European Central Bank President Mario Draghi said critics of the euro underestimated the region’s political commitment to the single currency.
“Many commentators on this side of the Atlantic looked at the euro area and were convinced it would fail,” Draghi said during a speech at Harvard University today. “They mistook the euro for fixed exchange-rate regime, when in fact it is an irreversible single currency. It is irreversible because it is born out of the commitment of European nations to closer integration.”
After the turmoil that began with Greece’s bailout in 2010, the euro area is emerging from its longest recession and leaders are seeking to build a banking union that will make the region’s financial system more robust. After lending banks more than 1 trillion euros ($1.35 trillion) in two long-term tenders and pledging to buy an unlimited number of bonds of reform-ready states, the ECB’s next step is to become the supervisor of the region’s largest banks starting next year.
“The changes taking place in the euro area are making our monetary union more robust,” Draghi said. “At the European level, we are approaching a balance of competencies which, taken in combination, should provide more effective stabilization.”
“If we look at the U.S., we see that it strengthened its union in different stages, with each stage eventually begetting the next,” said the ECB president, who will take part in the International Monetary Fund’s annual meetings in Washington this week. “In Europe today, we are in some ways undergoing an analogous process.”
Draghi said that Europe is attempting to remove the national fault-lines that divide the banking sector, to create a unified system to match the single currency.
“This means that one euro in a bank in any euro area country has to be fully substitutable with a euro in another,” he said. “The only way to achieve this is to remove the differences in the banking system that can create fragmentation along national lines -- and the most important difference is the way banks are supervised and, when necessary, resolved by national authorities.”
While the Frankfurt-based central bank is due to take up supervision duties in the fourth quarter of 2014, policy makers have also said they want Europe’s leaders to agree to a centralized system to deal with failing lenders, with funds to back it, to be ready at the same time.
“We trust that a single resolution mechanism will enter into force by the beginning of 2015,” Draghi said.
Even if banking union smooths national differences, it shouldn’t remove the disciplining function of the individual sovereign-debt markets, he added.
“There is also a strong onus on governments to ensure that sovereign debt performs its expected function in the financial system -- that is, as a risk-free, safe asset,” Draghi said.