Banking on a sustainable recovery in Europe

October 3, 2013

Yesterday I participated in the Governing Council meeting of the European Central Bank in Paris, in my normal non-voting capacity. I also had a productive meeting with Prime Minister Jean-Marc Ayrault and Finance Minister Pierre Moscovici on the French reform process, which is moving forward, supported by social dialogue.

One key issue for the ECB and its Governors is the forthcoming balance sheet assessment of euro area banks, which is essential to reinforce confidence in the European banking sector and thus to improve the credit flows to households and businesses, particularly SMEs. That economic growth requires credit growth is a fact of economic history.

President Mario Draghi accurately explained to the press the Commission’s approach to the treatment of capital injections under the EU fiscal rules. In short, there is a clear marching order to be followed in cases where recapitalisation is necessary. If the balance sheet assessments reveal capital shortfalls, these would be covered first via private solutions and internal resources – shareholders and junior creditors – before resorting to public backstops. Where state support is necessary, the new state aid rules in force since 1 August apply.

As regards the treatment of capital injections under EU fiscal rules, these are normally considered as “relevant factors for financial stability” and/or as one-off measures, and thus not included in the structural balance and not counting against the Member State in the context of the Excessive Deficit Procedure. As such, there is no disincentive to effective public backstops caused by these fiscal rules.

Cleaning up balance sheets is a pre-condition for growth but also for resuming the path towards more genuine financial integration in Europe, namely through the creation of the banking union. To strengthen the gradual recovery that is now at its early stages, we need to make decisive progress on both of these fronts in the coming months.

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