European Banks : ECB Releases Structure

European Banks : Curtain Raiser on Structure

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Euro Zones End Game.. Surgery or contagion .. Next Week

The G20 and World Central Bankers League have been pushing the World economy out of the hole of depression from 2008. The Lehhman Crisis culminated into the Landmark of its Own. While US interest rate buried underground, the ' Free Money ' streamed into Hard Assets and New Gold Investment Wave is ebbing the world. The American easing and Housing Crisis:  emboldened $ bears to press the panic Button on $ as Reserve Currency. While barley 15 months ago Euro was pampered to replace the greenback. The fall in dollar had counter effects on Inflation rising and thus devaluation of all other currencies followed the lead,  last year. Which in turn created the another crisis in Euro and particularly cracked the weaker areas of Euro zone. Here came ' PIGS '. The rattle has now turned into a Roar.

A thunderstorm had mean while struck the Central Asian politics. Upheavals in Tunisia, Egypt, Libya, Syria, UAE, Pakistan, Indonesia. While, the Brutal Force of nature hit the Japan, Australia, Indonesia, Peru, Chile and Pakistan. The War in Afghanistan is besieged. The tensions in Iran-US still threaten to blow into a war..?
India stifled by the Inflation, the government is rattled by the Corruption. The opening of retail remains impasse in vogue. 

The 23rd June Joint Action to release the Crude Oil Reserve's successfully derailed the Oil ' rally '. The Rising Bond Market yields is now beacon of the near future. Which is flashing fully Red.

While, China and India are slowing down rapidly. Raising Alarms and Flashing the signals of Global Slow Down. The pace of slow down and its impact is exerting from Europe.

Will Europe disintegrate..? Will Euro as Currency disintegration be averted and  ' Risk ' trade .?

How all this may impact on the Half on S&P 500, dependent on World Trade shall be..?

Next Week, Market will look into future and will Watch the European in Hectic activities.

Merkel - Sarkozy Pact , Timothy Geitner's European Meetings, ECB Meet Thursday, Mario Monti's Italian Budget, Greek Budget and Finally Euro Parliament on Friday may draw Curtains on to Whether Greek remains in Euro Zone. It Seems that resolution is Whether Whole of Europe will suffer from the Either a Surgery or a Contagion of Debt. In short, next week shall be the week when Europe decides How to Suffer.?  and Bear the pain. It seems French want it Slow Death and Germans want a Surgery..!

In either case risk may take a dive in the Sands of Atlantic... and Across the world.

United Banking Money dousing Action: Press Releasse

For release at 8:00 a.m. EST

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. 

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

http://www.ecb.int/press/pr/date/2011/html/pr111130.en.html.

PRESS RELEASE

30 November 2011 - Coordinated central bank action 
to address pressures in global money markets

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from 5 December 2011. The authorisation of these swap arrangements has been extended to 1 February 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorised through 1 February 2013.

European Central Bank Decision

The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese yen, sterling, Swiss francs and Canadian dollars (in addition to the existing operations in US dollars).

The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing. The schedule for these operations, which will take the form of repurchase operations against eligible collateral and will be carried out as fixed-rate tender procedures with full allotment, will be published today on the ECB’s website.

In addition, the initial margin for three-month US dollar operations will be reduced from currently 20% to 12% and weekly updates of the EUR/USD exchange rate will be introduced in order to carry out margin calls. Those changes will be effective as of the operations to be conducted on 7 December 2011. Further details about the operations will be made available in the respective modified tender procedure via the ECB’s Website.

The Debt Contagion to Eastern Europe: Stalling Growth

   

Eastern Europe is at risk of its economies running out of credit as western lenders may have to focus on recapitalizing themselves, making it difficult to fund their units in the region.

With about three-quarters of the region’s banking industry owned by western lenders such as UniCredit SpA and Erste Group Bank AG, local units are likely to receive less support, “bearing on credit growth,” the European Bank for Reconstruction and Development said last week.

Lenders that bankrolled eastern Europe’s boom before the 2008 credit crunch are already squeezed by deteriorating loan quality and slowing economic growth. The region was the world’s worst-hit in the aftermath of the collapse of Lehman Brothers Holdings Inc. three years ago and faces the threat of the same fate as the euro area’s troubles spread.

“This will definitely have an impact,” Christian Keller, an emerging-markets economist at Barclays Capital in London, said in a telephone interview. “If you have a banking system that is intrinsically linked to western European banks and western European banks deleverage, you realize that growth in that region will no longer be as it was before.”

Capital Reserves

By June 30 next year, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided yesterday. That may require an additional 106 billion euros ($149 billion) of capital, according to the European Banking Authority.

Increased capital adequacy requirements may prompt lenders to “shrink balance sheets,” Keller said.

The summit in Brussels also persuaded bondholders to take 50 percent losses on Greek debt and expanded the euro region’s rescue fund to 1 trillion euros ($1.4 trillion). Lenders have until Dec. 25 to submit money-raising plans to national supervisors.

Italy’s UniCredit, the largest lender in eastern Europe, needs 7.38 billion euros of fresh capital, while Erste, which owns the region’s second-biggest banking group, requires 59 million euros, according to the European Banking Authority. Raiffeisen Bank International AG, the region’s third largest, will need to fill a 1.9 billion-euro capital shortfall, the regulator said today.

‘Excess Penetration’

Lending is weakening in eastern Europe compared with the first half, when it grew 3 percent in the EBRD’s 29 countries, including a contraction in half of them, said Erik Berglof, the EBRD’s chief economist, citing inflation-adjusted figures.

Funding from western lenders added 1.5 percentage points of annual growth between 2003 and 2008 as banks feasted on new markets opening up with the European Union’s expansion waves in 2004 and 2007, according to the International Monetary Fund.

“Banks pumped all this wholesale in there, which otherwise wouldn’t have been there,” said Ronny Rehn, a banking analyst at Keefe, Bruyette & Woods in London. “This whole excess penetration is correcting.”

Loan growth is less than 10 percent everywhere in the former communist bloc, less than a third of the 2007-08 rate, the IMF said. OTP Bank Nyrt., Hungary’s largest bank, predicts that corporate lending in the country will stagnate or shrink next year because of a capital shortage at some rivals, Deputy Chief Executive Officer Laszlo Wolf said.

‘It’s an Illusion’

“It’s an illusion today that if a bank is foreign-owned it definitely has capital strength and its owner is well capitalized,” Wolf said in an Oct. 20 interview.

The amount of capital flowing into Hungary will be sufficient for “performing the necessary minimum amount of tasks” as the country is at a competitive disadvantage because of its special tax on banks, Ferenc Szabo, the deputy chief executive of Raiffeisen’s local unit, said in an interview yesterday.

Western banks will examine “every part of their balance sheet” and may be more willing to sell subsidiaries than before and more reluctant to roll over financing when it matures, Keller said.

Euro-region recapitalization plans must include the eastern units, the EBRD has said. The London-based lender in 2009 orchestrated the Vienna Initiative, a pledge from the region’s biggest banks to continue financing their units.

Deleveraging Threat

“Support must be extended to the subsidiaries,” Berglof said in a telephone interview on Oct. 14. “The deleveraging process is threatening what’s been achieved.”

The Vienna Initiative must be revived as there is a danger that western banks will reduce exposure in the east, Romanian central bank Deputy Governor Cristian Popa said at a conference yesterday in Dubrovnik, Croatia.

Economic growth is slowing, tracking euro countries that buy the bulk of the region’s exports. The IMF cut its 2011 growth estimate the most for the region, along with the U.S., in its World Economic Outlook last month.

Central and eastern Europe’s economies contracted by 3.6 percent in 2009 before rebounding 4.5 percent in 2010, according to the Washington-based lender, which predicts 2.7 percent growth next year.

Western banks need to reconsider their business model in eastern Europe and cover lending increasingly from local deposits, which will slow lending growth, according to KBW’s Rehn. Erste and UniCredit have already announced they will seek to cut reliance on funding from abroad at their units.

Capital Pledge

Vienna-based Erste, the second-biggest lender in eastern Europe after UniCredit, said on Oct. 10 it expects to swing to an 800 million-euro loss this year after writedowns and provisions of 1.6 billion euros. It pledged to inject capital to its Hungarian and Romanian units.

With financial markets less developed in the east and growth outpacing the west, banks that have made the most investment will be reluctant to withdraw, said Jerome Booth, who helps manage about $47 billion of emerging-market assets as co- founder and head of research at Ashmore Investment Management in London, said.

“If you’re in these markets, you’re in there because you want to build your market share,” Booth said by telephone. “All of these banks know that the attractive future markets are the emerging markets. They are not going to be wanting to give up space.”

UniCredit’s Bank Austria AG unit, which oversees the lender’s eastern European businesses outside Poland, is “trying to focus more on local funding,” Chief Executive Officer Willibald Cernko said on Oct. 21, adding that “this is only going to be even more the case in the future.”

Foreign lenders “will remain risk averse,” said Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London. The consequences may be “less credit, which means even weaker growth and recovery.

Mario Draghi takes over from ECB Presidency

1 November 2011 - Change of presidency of the European Central Bank

Today, Mr Mario Draghi, former Governor of the Banca d’Italia, has taken up his duties as President of the European Central Bank (ECB).

He was appointed on 23 June 2011 by the European Council for a term of office of eight years.

He succeeds Mr Jean-Claude Trichet, who was President of the ECB from 1 November 2003 to 31 October 2011.

un moyen, pas une fin---but punish deficit sinner Father Trichet

Interview with Bild am Sonntag

Interview with Jean-Claude Trichet, President of the ECB,
conducted by Walter Mayer and Michael Backhaus on 27 October 2011

Mr President, your term of office comes to an end on Monday. The euro is in stormy waters and the captain is leaving the ship. How hard is that for you?

It has been an immense honour and responsibility to be President of the ECB for the last eight years, and to have been able to maintain price stability since the inception of the euro. The last four years have been a very challenging period for all the staff of this institution. This global crisis has presented all of us – both governments and central banks – with considerable and thoroughly unexpected challenges. In any case, this eight-year mandate, which is not renewable, is an essential feature of the independence of the ECB.

In recent weeks and months you’ve spoken forcefully about this being the most severe crisis since the Second World War. Can you now give the all-clear, following the decisions taken by the Heads of State or Government this week?

The global crisis began in the United States, before spreading throughout the industrialised world. The crisis is not over. It has laid bare the weaknesses of advanced economies. We are now seeing the weaknesses of the US and Japanese economies – but also, of course, Europe’s weaknesses. Europe’s governments have made serious mistakes, such as failing to comply with the Stability and Growth Pact. And they did so despite the fact that the ECB was emphatic in warning them of the importance of complying with the requirements of the Pact. In addition, some countries failed to pay sufficient attention to their own competitiveness. The critical issue now is for the rules of the Pact to be comprehensively tightened up and implemented. The European Council was in full agreement on this point.

What would be the worst case scenario were all of the Member States’ precautionary measures to fail?

The decisions taken at the summit meeting need to be implemented with great precision and speed. The euro area’s Heads of State or Government have a plan, and national governments and the European Commission now have some hard work ahead of them. Swift and full implementation of those decisions is now absolutely critical. We will monitor this process very carefully. Now is the time for action.

What kind of future would Europe have without the euro?

We have to be very careful to distinguish between the euro as a currency and the problem of financial stability in the euro area. The first 13 years of the euro have seen the currency retain its value, both domestically and externally. Annual inflation currently averages 2.0% – and just 1.56% in Germany. That is lower than in the previous 50 years. Inflation will, in all probability, remain very low for the next ten years – at around 1.8% according to current expectations. So, we have price stability in the euro area. We are rightly proud of that fact, as we have achieved what was expected of us: we have secured price stability and ensured that the euro is a credible and trusted currency. The financial stability of the euro area is a different story. This has been undermined by mismanagement on the part of certain governments. However, following the decisions taken this week, I am confident that governments can succeed in restoring financial stability. A critical issue in this respect will be the will of the people. I was very impressed by the decisiveness displayed by the German parliament this week.

The euro’s rescue fund is being significantly strengthened, with its total firepower set to reach €1,000 billion. Does this mean that the ECB will, in future, be able to do without its controversial purchases of stressed countries’ government bonds?

We have adopted special measures during the crisis because they were necessary in order to correctly transmit our interest rate decisions to the economy. In August 2007 we supplied banks with liquidity at fixed rates of interest in order to stabilise the markets. Second, we took the decision to buy covered bonds. And third, we intervened in some government bond markets to help improve the transmission of our monetary policy. Such actions are only justified in the exceptional circumstances of a major global crisis. Once national governments’ new tools to restore financial stability are up and running, we will have no reason to continue with these special measures.

Does the ECB really have complete freedom as regards government bonds, or is it under political pressure?

The ECB takes its decisions in full independence. We have consistently demonstrated this, taking controversial decisions on interest rates and other matters. Under the Treaties, members of the ECB’s Governing Council are not permitted to take instructions from anybody – neither from governments nor from interest groups. Indeed, they are not even allowed to ask for instructions. It was for monetary policy reasons that the Governing Council, in full independence, adopted all the non-standard measures.

The crisis is being caused by excessive debt in euro area countries. Do we need a political union, or is a return to the Stability and Growth Pact of Maastricht sufficient in order to prevent such events from recurring in the future?

What is important at the moment is to monitor compliance with the now considerably stricter stability requirements. We had initially called for these to go further – calling, for example, for more automatic sanctions against “deficit sinners”. Significant progress has been made, and that now needs to be rigorously implemented. That includes strengthening the presidency of the Eurogroup and the body of staff which is to monitor economic developments. In the medium and long term we need to strengthen Europe’s political structures, which will not be possible without amendments to the Treaty. I would say – as a citizen of Europe, not as President of the ECB – that we could proceed in the direction of significantly stronger European governance with well-defined responsibilities. With that new governance, it would be possible, in countries that consistently fail to comply with stability requirements and thereby threaten the financial stability of the euro area, to directly implement appropriate measures. In the long term, therefore, we will need to go further in the direction of political union. But the decision on that will lie with the people of Europe.

What was your most important decision, your greatest success?

As a central banker, you are constantly taking important decisions – for example on interest rates. All of these decisions are taken with the aim of ensuring price stability, which is a prerequisite for sustainable growth and job creation. As a result, it is difficult to say that a particular decision was the most important. But the greatest challenge for the ECB’s Executive Board was to recognise in 2007, in real time, that something very significant – something very dangerous – was happening. We were the first central bank in the world to recognise the reality of the situation and quickly implement comprehensive measures in response.

Horst Köhler, with whom you negotiated the Maastricht Treaty, describes the markets as “monsters”. Is he right?

I would not necessarily go as far as Horst, for whom I have great respect, but I can see what he could have meant by that. Supervisory authorities need stronger means of monitoring the rapid development of new technology and need to ensure that all innovation in the financial markets continues to serve the real economy and is not to its detriment. Realisation as to what was happening in the markets came somewhat late. We are currently seeking to correct that. Authorities the world over agree that we need to discipline the markets and the financial system as a whole and make them much more resilient in all circumstances.

Jesus drove the money-changers – i.e. the bankers – out of the temple. How do you, as a man of money, feel about this parable?

Central bankers are guardians of monetary stability, which is a public good. So, when the markets run riot, whether on the upside or on the downside, we ensure that there is a return to discipline. Wisdom needs to discipline “animal spirits” – excessive greed or fear. On the other hand, I would certainly warn against making it difficult for banks to carry out their functions. In Europe, banks finance 75% of all economic activity. The real economy needs banks to finance investment, and we should not mistreat or ignore them. We would be shooting ourselves in the foot if we did that.

You experienced the occasionally violent protests of the 1968 movement at close quarters – from ministries in Paris with people demonstrating in front of them. How seriously do you take the “Occupy” movement, which has spread from Wall Street to cities around the world?

I think we should always be very attentive to the signals coming from society. They are manifold and complex. People are asking themselves how it was that first the financial markets and then the real economy turned out to be so vulnerable. We now need to make our market economies much more robust, as only they are capable of creating wealth and employment. And banks need to strengthen their resilience and avoid behaviour – including excessive bonuses – that is not compatible with the values of our societies. These are the messages that I would take from public opinion. We are all working hard to strengthen the financial system, both at the European and at the global level.

To what extent has the greed of the financial markets damaged the notion of the market economy and freedom in Europe and beyond?

We should be very conscious of the fact that certain behaviour in the markets has caused considerable irritation. That includes the size of certain bonus payments. This has shocked the public on both sides of the Atlantic. We therefore need a change in values and a change in behaviour in this respect. We are all living in democracies, and for that reason it is very important that society accepts the values and behaviour observed in the economy.

You’ve spent the last 40 years working in the public sector in the area of monetary policy – first in Paris for France, and now in Frankfurt for the euro area. Can you tell us something: what is money, the nature of money?

Money has an essential function. It acts as a store of value, it is a means of exchange and it allows people to calculate the price of everything. Money is an inseparable element of civilisation, as it allows the division of labour. It is only thanks to money that we have cities at all. I would compare money to a poem, since a poem always retains its structure, just as a gold coin always retains the image stamped on it. Once formed – whether written or minted – these two things should not and cannot be altered. Goethe gave considerable thought to this issue, as you can see from reading Faust.

To what extent are you personally fascinated by money?

I, personally, am not fascinated by wealth.

In Germany we say that money rules the world. Would you, as a man of money, confirm that?

No, I would not say that at all. Ideas rule the world – hopefully. Money is a means, not an end; an instrument, not the ultimate goal; un moyen, pas une fin.

Your wife recently said on German television that the question of whether she was pleased that her husband’s work was coming to an end was a “delicate and difficult question”. She also said that she hopes you find something to occupy yourself with as soon as possible. What does Madame Trichet mean by that?

Did she really say that? She knows me well. I will certainly remain active. But I will wait until I have left the ECB before deciding what exactly I will do.

Does she perhaps mean that Jean-Claude Trichet cannot be happy without work?

You can trust my wife on that!

Mr Trichet, why is your signature on the euro banknotes?

The euro banknotes are issued by the ECB. I therefore sign the euro banknotes as President of the ECB, on behalf of the Governing Council. Currently there are around 14 billion euro banknotes in circulation.

George Soros's 7 Steps to European Banks

My seven-point plan to save the eurozone
George Soros

1) Member states of the eurozone agree on the need for a new treaty creating a common treasury in due course.  They appeal to European Central Bank to co-operate with the European financial stability facility in dealing with the financial crisis in the interim – the ECB to provide liquidity; the EFSF to accept the solvency risks.

2) Accordingly, the EFSF takes over the Greek bonds held by the ECB and the International Monetary Fund.  This will re-establish co-operation between the ECB and eurozone governments and allow a meaningful voluntary reduction in the Greek debt with EFSF participation.

3) The EFSF is then used to guarantee the banking system, not government bonds.  Recapitalisation is postponed but it will still be on a national basis when it occurs.  This is in accordance with the German position and more helpful to France than immediate recapitalisation.

4) In return for the guarantee big banks agree to take instructions from the ECB acting on behalf of governments.  Those who refuse are denied access to the discount window of the ECB.

5) The ECB instructs banks to maintain credit lines and loan portfolios while installing inspectors to control risks banks take for their own account.  This removes one of the main sources of the current credit crunch and reassures financial markets.

6) To deal with the other major problem – the inability of some governments to borrow at reasonable interest rates – the ECB lowers the discount rate, encourages these governments to issue treasury bills and encourages the banks to keep their liquidity in the form of these bills instead of deposits at the ECB.  Any ECB purchases are sterilised by the ECB issuing its own bills.  The solvency risk is guaranteed by the EFSF.  The ECB stops open market purchases.  All this enables countries such as Italy to borrow short-term at very low cost while the ECB is not lending to the governments and not printing money.  The creditor countries can indirectly impose discipline on Italy by controlling how much Rome can borrow in this way.

7) Markets will be impressed by the fact that the authorities are united and have sufficient funds at their disposal.  Soon Italy will be able to borrow in the market at reasonable rates.  Banks can be recapitalised and the eurozone member states can agree on a common fiscal policy in a calmer atmosphere.

Tomorrow and the day after tomorrow: a vision for Europe : Jean-Claude Trichet

Speech by Jean-Claude Trichet, President of the ECB, 

at the Humboldt University,
Berlin, 24 October 2011

Ladies and gentlemen,

It is a great pleasure to be invited to speak here at the Humboldt University this evening. One can only be honoured to be in the university of Hegel, Heinrich Heine and the Nobel prize-winning physicists Albert Einstein and Max Planck – not to mention 27 other laureates. But it is with the ideas of the university’s founder – Wilhelm von Humboldt – that I would like to begin my remarks.

As a Frenchman who has lived in Germany for the past eight years, I note with interest that the mother of the university’s founder – Marie-Elisabeth Colomb – came from a French Huguenot family who also made that eastwards move. Her family had emigrated to Berlin following the Revocation of the Edict of Nantes, a reminder that European integration is a process that has been with us for centuries.

Wilhelm von Humboldt himself was deeply engaged with the question of how to create the conditions for individuals to flourish within a society. His answer involved removing the conditions for mutual harm.

In some ways, this speaks to the challenges of European integration.

The individual Member States of the European Union (EU) also seek to flourish. Their actions are interdependent and can both benefit and damage each other. Removing the potential for mutual harm is essential for collective prosperity.

This dialectic between the individual and the community is at the core of the European project. It is the dialectic between the individual nation states and the community of nations. And it presents some of Europe’s most fundamental challenges.

I would like to reflect today on how to address these challenges – to look forward and offer a perspective of where Europe could go.

In particular, I would like to develop three propositions.

First, while the reasons for European unity have often been presented as deriving from past conflicts and past divisions, forward-looking motivations are in my view decisive.

The unique construction of Europe – with strong local identities and large, integrated markets – is a source of great strength in the new, globalised world we face. It allows Europeans to plant deep roots and build strong communities. At the same time, we can fully benefit from economies of scale and the free flow of trade and investment.

For this reason, European integration is profoundly in the interests of all Member States and deeply connected to their future prosperity.

Second, for Europe to realise fully its future potential, it needs the right rules and the right institutions.

Europe requires a solid form of governance to ensure that the actions of individual countries are oriented towards the common good. Our current arrangements have not yet fully met this standard. They are now being improved. It is a continuous process which will call for Treaty changes if necessary.

As this process will take time, we need to start planning today for the Europe of tomorrow and the Europe of the day after tomorrow.

Third, the underpinning of a more integrated Europe is the emergence of a true European public debate.

As one would say in German, die Schaffung einer europäischen Öffentlichkeit.

Europeans today are highly interconnected via economic and social linkages. Yet our fragmented national public discourse does not necessarily permit citizens to understand fully these connections.

A true European public debate would help us deepen our interest in each other, bridge our linguistic differences and care more about what is happening across our borders.

These are the three main themes on which I will focus tonight.

But before I talk about the Europe of the future, I would like to talk about the Europe of today. To reflect on the relationship between member countries and Europe. And to touch on the challenges we collectively face in tackling the crisis.

1. Europe and Germany

Building deeper union between France and Germany in the service of Europe has been an important theme of my own working life. In this time, I have been profoundly influenced by the German commitment to a stability culture.

In the 1980s, I was seen in my own country as the strongest advocate of the ‘franc fort’ policy. This policy was designed to be part of the modernisation of the French economy through a “competitive disinflation” policy.

In the 1990s, I worked side-by-side with Hans Tietmeyer and Horst Köhler to contribute to the foundations of the euro in the Maastricht Treaty. This work was to ensure that, among other things, the European Central Bank (ECB) would be based on the principles of independence and the pursuit of price stability.

Then in 2003, I had the honour of moving to Frankfurt to become President of this institution.

It was a great personal satisfaction to join an institution that embodied my deep-seated beliefs in central bank independence, price stability and economic discipline.

Over this period I have developed a strong admiration for Germany and its people, and also for the way that Germany conducts its economic policies.

The German economy has often been thought of as the engine of the European economy. But less than 10 years ago, Germany was seen by some observers as the “sick man of Europe”.

Let me cite some books and newspaper articles from that time:

“Can Germany be saved?”, asked one of this country’s most well-known economists in 2003, noting that “Germany provides something of a case study of what not to do in designing a prosperous future”.

“How the mighty are fallen”, said a major international magazine also in 2003, well representing the mainstream economic analysis. "After the German economy was seen as an exemplary model of successful capitalism for decades,” the magazine went on, “ today it is Germany that economists point to with a mixture of contempt and alarm.”

“Vom Meister zum Mittelmaß”, wrote a major German newspaper in 2005, speaking of “absteigende Staaten wie Deutschland, die in ihrer Bedeutung schrumpften und ihren Haushalt nicht in den Griff bekämen. ”

Thankfully, these gloomy forecasts proved mistaken, and today, Germany is in the lead in rebounding from the crisis.

Since the trough of mid-2009, German real GDP has grown by 6.9% compared with the euro area as a whole by 3.8%. Employment in Germany has increased by 2.1%. Exports have grown by 25.6%. This performance is no accident. Neither is it based on cyclical, unsustainable factors. It is the result of sound fiscal policies, permanent attention to unit labour costs, and bold reforms that have been rigorously implemented over a prolonged period. And it sets an example that is very important for the current situation.

First, it demonstrates how sound policies can lead to prosperity within economic and monetary union.

By encouraging industries to embrace the opportunities of globalisation. By maintaining technological excellence. By prioritising cost and price competitiveness. And by ensuring flexibility in the labour market.

Second, it proves that it is possible to regain competitiveness within monetary union.

Germany after the post-unification boom had a very serious competitiveness problem itself. It took a sustained effort to become competitive again.

This gives encouragement to euro area countries that have lost competitiveness and now must regain it. It also underscores the fact that the adjustment effort must begin immediately.

But there is also a third lesson from the German example.

Would the German recovery have been possible without the euro and Germany being in the euro area? Without Germany benefiting from a vast single market of the size of the United States with a highly stable currency?

The German recovery has taken place in the context of the best inflation record achieved by a major central bank for over 50 years. The ECB has delivered an average rate of inflation of 2.0% since beginning operations in 1999. In Germany it is even lower with an average yearly inflation rate of 1.57%.

Such a low rate of inflation over a comparable time period is actually the lowest in Germany for over 50 years. Moreover, expectations of future inflation remain firmly anchored in line with our definition of price stability.

Financial markets and euro area citizens expect the ECB to deliver on its mandate. The German public can rely on our steadfast commitment to do so.

The euro has extended the zone of monetary stability to Germany’s main trading partners in the euro area. As more than 40% of Germany’s exports go to other euro area countries, this is very important for German prosperity. The stability of the euro has also helped German companies remain competitive vis-à-vis the rest of the world.

2. Europe and the crisis

Let me now turn directly to our current challenges. As you are all well aware, we continue to face the most serious economic and financial crisis since World War II. Tackling the crisis has required unprecedented action from public authorities to maintain economic and financial stability.

Inevitably this has produced diverging views. This is not surprising. The euro area is responding to events of historical importance and it naturally takes time to forge consensus on the right way ahead.

But it is very important that people do not misconstrue these debates. They are about policies, not about principles, because in the euro area our principles do not change.

Our principles are the foundations on which we rest. Stability. Responsibility. Independence.

But our policies must adapt. No two crises are the same. It is precisely because we want to defend and reinforce the principles we cherish, that we have to shape our policies appropriately.

I am fully aware that in this country people have genuine concerns about the single currency. They seek assurance that it remains a community of stability. That it is founded on rules and responsibilities. And that the rules are respected and the responsibilities are taken seriously.

I would like to use this occasion to explain the way the Governing Council of the ECB is deciding on monetary policy.

Our standard measure for fulfilling our mandate of maintaining price stability – avoiding both inflation and deflation – is interest rate policy. But effective interest rate policy requires that our policy decisions are transmitted to the real economy. If that is not the case, our monetary policy cannot achieve its objective.

In this transmission, both banks and financial markets play an important role. They are crucial for the financing of the real economy – of firms and households. Yet the crisis has damaged banks and at times severely disrupted the functioning of financial markets.

Addressing these problems needed to be done through non-standard measures. The ECB has decided such measures, for monetary policy reasons, since the very start of the global crisis. It has been offering liquidity to financial institutions at a fixed rate and with full allotment. It has also provided this liquidity over an extended period of time, up to 12 months, so that the euro area banking sector, Germany’s banks included, could continue to be as correct as possible a vehicle for the transmission of our monetary policy.

With additional liquidity demanded by the euro area banks, our balance sheet has expanded during the crisis. But we have been prudent. Our balance sheet has expanded by about 80% since the beginning of the crisis. Only for the sake of comparison the balance sheet of the Federal Reserve increased by about 230%, that of the Bank of England by 205%, and that of the Swiss National Bank by 235%. The crisis hit all of the economies concerned, but you can see that all our non-standard policies have been measured.

Of all our non-standard measures, the policy of full liquidity allotment at fixed rates has been the most important one in my view. Yet it is the bond market interventions that have received the greatest attention, and the most scrutiny.

But just as our measures of enhanced credit support have been necessary to ensure that banks continue to extend credit to the real economy, our bond market interventions have been necessary to help foster a more appropriate transmission of our policies to the real economy. The government bond markets are crucial for our monetary policy transmission. They largely determine the prices of loans and mortgages and thus affect, indirectly, the transmission of monetary policy to all firms and households.

The ECB’s government bond market interventions are not inflationary. Unlike the bond purchase programmes of other major central banks our aim is not to inject additional liquidity. We actually absorb all liquidity injected by these purchases on a regular basis – euro for euro, week by week.

There is no fuelling of money growth in the euro area. M3 growth is less than 3% currently and inflation expectations have remained firmly anchored by all standards.

So let me emphasise this point. It is very important to understand that all the ECB’s policy decisions during the crisis have been made fully in line with our mandate to maintain price stability.

They have been taken in full independence and we have established a solid track record for our independent decisions. Both inflation and inflation expectations in the euro area demonstrate the value of independent deeds, not just words.

Last week in Frankfurt, at the occasion of my official farewell as President of the ECB, Prime Minster Juncker, the longest-serving prime minister in Europe and chair of the Eurogroup, said that discussions of government pressure on the ECB lacked any basis in fact, that such pressure would have been completely futile and that the ECB always acts completely independently.

3. Europe and the future

I have talked about where Europe has come from. Let me turn now to where Europe is going.

When people seek a justification for European integration, there is a tendency to look backwards.

European integration has banished the spectre of war from our continent, is always stressed. European integration has delivered the longest period of peace and prosperity in European history.

This perspective is entirely correct. But it is also incomplete.

There are many more reasons for striving towards “ever closer union” in Europe today than there were in 1945. And these are entirely forward-looking.

65 years ago the distribution of global GDP was such that Europe had only one role model for its single market: the United States of America.

Today, Europe is faced with a new global economy, reconfigured by globalisation and by the emerging economies of Asia and Latin America.

It is a world where economies of scale and networks of innovation matter more than ever. By 2016 – that is, very soon – we can expect the euro area in terms of purchasing power parity to be below the GDP of China and over and above the GDP of India. Together, these two countries would represent around twice the GDP of the euro area.

Over a longer horizon, the entire GDP of the G7 countries will be dwarfed by the rapid development of the systemic emerging economies.

Europe has to cope with a new geo-political landscape very profoundly reshaped by these emerging economies.

And Europe is also faced with new global challenges, such as climate change and migration, where effective solutions are possible only at the European and international levels.

In this new global constellation, European integration – both economic and political – is central to achieving prosperity and influence. For an outward-looking, export-oriented country like Germany, this is profoundly in its interests.

The challenge is to set the correct path for European integration. Getting this right is essential to realise fully our continent’s tremendous potential. Let me therefore lay out a vision for the Europe of tomorrow.

The Europe of tomorrow

The creation of Europe’s economic and monetary union is unique in the history of sovereign states. The euro area constitutes a “society of states” of a completely new type.

Like individuals in a society, euro area countries are both independent and interdependent. They can affect each other both positively and negatively.

Good governance requires that both individual Member States and the institutions of the EU fulfil their responsibilities.

First and foremost, every country in the euro area needs to keep its own house in order.

This means responsible economic policies on behalf of governments and rigorous mutual surveillance of those policies by the Commission and Member States – going beyond the indispensable surveillance of fiscal policies to encompass all aspects of the economy.

In a society, the institutions of law enforcement can ultimately compel a citizen to abide by the rules. In the euro area, our framework based on surveillance and sanctions depends on the willingness of offending states to comply.

I am aware that many observers wonder what can be done if a Member State simply cannot deliver on its promises.

That is why, when I had the deep honour of receiving the Karlspreis, I suggested a new approach to the policing of economic governance.

For countries that lose market access, the current approach of providing aid against strong conditionality is justified. Countries deserve an opportunity to put the situation right themselves and to restore stability.

But as I suggested in Aachen, this approach should have clearly defined limits. A second stage should be envisaged for a country that persistently fails to meet its programme targets.

Under this second stage, euro area authorities would gain a much deeper and more authoritative role in the formulation of that country’s economic policies.

This would move us away from the present concept where all decisions remain in the hands of the country concerned. Instead, it would be not only possible, but in some cases compulsory, for the European authorities to take direct decisions.

Implementing this idea of the second stage would evidently require a Treaty change. It would also imply a new concept of sovereignty. This is necessary given the complex interdependence that exists between euro area countries. And it is ultimately in the interests of all citizens of the euro area.

In my view, it was important to launch such reflections as soon as possible. I am very happy that the European Council, at its meeting yesterday in Brussels, has indicated in its conclusions: “The European Council notes the intention of the Heads of State or Government of the euro area to reflect on further strengthening of economic convergence within the euro area, on improving fiscal discipline and deepening economic union, including exploring the possibility of limited Treaty changes.”

The Europe of the day after tomorrow

Let me now look even further into the future. A vision that can stabilise expectations needs to address not just tomorrow, but also the day after tomorrow. And as it takes time to implement such a vision, we must start thinking about it today.

It is my firm conviction that the Europe of the day after tomorrow will be of an original type – a new type of institutional framework.

In Aachen, on a personal basis, I began to reflect on some elements of this new possible framework.

I asked the question: with a single market, a single currency and a single central bank, would it be too bold to envisage a ministry of finance of the Union?

This European finance ministry would, first, oversee the surveillance of both fiscal policies and competitiveness policies, and when necessary, have responsibility for imposing the “second stage” I just described.

Second, the ministry would perform the typical responsibilities of the executive branches regarding the supervision and regulation of the EU financial sector.

And third, the ministry would represent the euro area in international financial institutions.

Since my Karlspreis address, it seems to me that the case for such an approach has strengthened.

I now hear leaders calling for a Treaty change to create stronger economic governance at the EU level. I hear euro area citizens calling for better supervision of the financial sector. And I know that our partners in the G20 look to Europe as a whole for solutions, not to individual Member States.

Increasingly, it seems that it is not too bold to consider a European finance ministry, but rather too bold not to consider creating such an institution.

This finance ministry would be only one element of the European future institutional framework. Exactly how these new institutions would eventually evolve one cannot say. As Jean Monnet once wrote: « Personne ne peut encore dire aujourd’hui la forme qu’aura l’Europe que nous vivrons demain, car le changement qui naîtra du changement est imprévisible ». ^[1]

We have several federal or confederal institutional frameworks in today’s world. To name only a few, the United States of America, the Federal Republic of Germany and the Swiss Confederation. The European Union is unique in its past history, in its present nature, in its future ambition. It will have to invent its own concept.

But one could imagine that in the future European institutional framework, the Council might evolve into the Senate of the Union, the European Parliament into the lower house, the Commission into the executive and the European Court of Justice into the judiciary – each time for the part of sovereignty that is shared.

And I have no doubt, taking into account the long and proud history of the European countries, that “subsidiarity” will play a major role in the future Europe – very significantly more than in the present models of federation.

As I said, these are personal remarks of a European citizen. The future of Europe is in the hands of its democracies, in the hands of the people of Europe. Our fellow citizens will decide. They are the masters.

In any case, whatever the future institutions of Europe will be, an essential element would be the emergence of a truly pan European public debate. As Europeans we connect deeply with our nations, traditions and histories. These are Europe’s roots. But we also need to extend our branches more widely.

To do this, the Euro area needs media, in the broadest sense of that word, that allow citizens to take a deeper interest each other. Media that provide regular information on events beyond national borders. Media that permit citizens to debate and exchange. And media that are not constrained by language barriers. All we need is a pan European public debate, a gemeinsamer öffentlicher Raum, a débat publique pan-Européen that allows Europeans to appreciate the wider community of which they are part – a community where their interests are increasingly shared and their lives more interdependent than ever before.

***

Let me draw to a close.

Twenty years ago, in 1991, my friend Hans Tietmeyer, the former President of the Bundesbank, said that “monetary union is not just a technical matter. It is in itself, to some extent, a political union”.

This condition creates mutual responsibilities.

We see that a challenge in one country can become a challenge for the euro area as a whole. Addressing it requires strong responses from all Member States, including Germany, and from EU institutions.

The global crisis has called into question the overall economic and financial strategy of major advanced economies. All have weaknesses in their economic systems. Not surprisingly, the main weakness for Europe was the nature of its institutional framework – in particular, that its economic and fiscal governance was not commensurate with the interconnectedness of economies sharing a single market and a single currency.

The question is how to confront those obstacles. We should not look back. We must look forward – to the opportunities of Europe for our collective betterment; and to the potential for every country to be stronger and more prosperous in a well-functioning union.

As far as the ECB is concerned, its Governing Council will continue to anchor solidly price stability and confidence in Europe – stability and confidence for 17 countries and 332 million fellow citizens who have decided to unite closely with a single market and a single currency. As Konrad Adenauer said in Aachen 57 years ago: “Gerade wird man die Mahnung verstehen, dass Europa uns heute Schicksalsgemeinschaft ist. Dieses Schicksal zu gestalten ist uns übergeben”. “Above all, people will understand the call: that Europe, for us today, is a community with a common destiny. It’s up to us to shape that destiny”.

Thank you for your attention.