{
  "title": "The Euro Area: Creating a Stronger Economic Ecosystem",
  "publication": "IMF News, March 28, 2019",
  "sourceUrl": "https://www.imf.org/en/news/articles/2019/03/28/sp032819-the-euro-area-creating-a-stronger-economic-ecosystem",
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  "summary": "Speech by Christine Lagarde, IMF Managing Director, Banque de France, Paris, March 28, 2019.",
  "authors": [
    "Christine Lagarde"
  ],
  "publishDate": "2019-03-28",
  "sections": [
    {
      "heading": "Introduction",
      "content": "- Speech by Christine Lagarde, IMF Managing Director, Banque de France, Paris, March 28, 2019.\n- Context:\n  - Celebrating the 20th anniversary of the euro and looking toward the next 20 years.\n  - The euro area has 19 member countries and represents the world’s second-largest economy.\n  - The euro is the world’s second-most traded currency.\n- Key outcomes over two decades:\n  - Real GDP per person in the euro area has increased by more than 60 percent over the past two decades.\n  - Public support indicators: three in five euro area residents say that the euro is good for their country; three-quarters say that the euro is good for the European Union.\n- Persistent challenges:\n  - One in four young people in the euro area is at risk of being in poverty.\n  - Economic activity in the euro area is slowing and risks are rising.\n- Framing question: Is the euro area better prepared for unexpected economic storms? Short answer given: yes, but not resilient enough."
    },
    {
      "heading": "The Current State of the Financial System",
      "content": "- Broad assessment:\n  - The Single Market in goods and services achieved substantial integration; comparable financial integration remains incomplete.\n  - Europe’s financial system is characterized as an underdeveloped irrigation system—delivering some but not enough financial “nutrients” to support full growth potential.\n- Imperative: “Now is the time to give euro area finance another big push.”\n\n a) Banking Union\n- Historical dynamics:\n  - Before the crisis: significant cross-border bank lending combined with national supervision and weak underwriting standards.\n  - Crisis dynamics: core banks pulled liquidity back home, contributing to credit crunches, asset-price collapses, and the euro area debt crisis.\n- Current metrics and concerns:\n  - Cross-border lending between banks in the euro area is back at 2005 levels.\n  - Firms in some euro area countries pay more than twice as much for credit than comparable firms in other euro area countries; similar disparities exist for households.\n  - Dispersion in borrowing costs has increased since 2009—described as the cost of fragmentation in finance.\n- Reforms implemented since the crisis:\n  - Creation of a single supervisor for banks.\n  - Higher capital buffers inside banks.\n  - Introduction of a new framework for handling bank failures and crises.\n  - Result: taxpayers are now less likely to be on the hook for massive bank bailouts than a decade ago.\n- Remaining issues and pressures:\n  - Persistent “home bias” in European banking.\n  - Higher capital has reduced returns on equity, prompting banks to pursue leaner business models.\n  - Competition from fintech firms poses new pressures on profitability and potential incentives to ease lending standards.\n- Policy prescription (explicit recommendation):\n  - Establish common deposit insurance funded by banks (not taxpayers).\n  - Member countries need to agree on a mutually acceptable balance between risk-sharing and risk-reduction—between trust and accountability.\n  - Urgent call for euro area leaders to reignite discussions, negotiate in good faith, and make difficult compromises to complete the banking union.\n\n b) Capital Markets Union\n- Rationale:\n  - Greater diversity of financing sources makes the financial ecosystem more resilient.\n  - Comparative data point: in the United States, the corporate bond market accounts for more than two-fifths of GDP, compared with only one-tenth in the euro area.\n  - Households in the euro area store 40 percent of their financial assets as bank deposits, leaving them exposed to the banking sector and over-reliant on banks for savings and investment financing.\n- Benefits of an integrated capital market:\n  - More uniform cost of funding for firms across countries.\n  - Higher returns on savings for households via diversified portfolios including other countries’ stocks and bonds.\n  - Greater ability for savers (e.g., Italian savers, German savers) to invest beyond domestic bank deposits.\n- Key reform areas to unlock capital markets union (three highlighted priorities):\n  - Transparency of information:\n    - Capital markets require high-quality public information, strong audits, and readily comparable data.\n    - Example: the standard for securitization that gives preferential regulatory treatment to simple, transparent, and standardized (STS) instruments; after a transition period, only these standardized securitizations will be eligible as ECB collateral.\n  - More efficient insolvency regimes:\n    - Faster and smoother insolvency processes free up capital for productive investment.\n    - Example metric: resolving a corporate insolvency in Greece takes about nine times longer than in Ireland.\n  - Taxation of cross-border investments:\n    - Withholding tax rules and divergent national treatments discourage cross-border investment.\n    - Recommendation: simplify and harmonize withholding tax rules so investments in other euro area countries are treated more like domestic investments.\n- Strategic ambition:\n  - Planting new “trees” in the capital markets to promote a Single Market in finance and transform Europe into a more vibrant, robust economy.\n  - Reference estimate: the Single Market for goods and services has raised GDP in the EU by an estimated 9 percent."
    },
    {
      "heading": "Conclusion",
      "content": "- Restated prescription: complete the banking union and the capital markets union to strengthen the euro area’s economic ecosystem.\n- Closing quotation and metaphor:\n  - Molière: “The trees that are slow to grow bear the best fruit.”\n  - The euro area, after 20 years, should show new resolve to complete the financial ecosystem so it can harvest benefits now and in the future.\n- Final plea: Europe’s courage, creativity, and perseverance should be trusted to deliver further integration and resilience.\n\nSpeech by Christine Lagarde, IMF Managing Director, Banque de France, Paris, March 28, 2019.\n\n---\n\n\n References\n\n- Christine Lagarde\n- France and the IMF\n- United States and the IMF\n- Speeches\n- PRESS CENTER\n- Staff Discussion Note\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2019/03/28/sp032819-the-euro-area-creating-a-stronger-economic-ecosystem"
    }
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    "Authors: Christine Lagarde",
    "Published: March 28, 2019",
    "Speech by Christine Lagarde, IMF Managing Director, Banque de France, Paris, March 28, 2019.",
    "Context:",
    "Key outcomes over two decades:",
    "Persistent challenges:",
    "Framing question: Is the euro area better prepared for unexpected economic storms? Short answer given: yes, but not resilient enough.",
    "Broad assessment:",
    "Imperative: “Now is the time to give euro area finance another big push.”",
    "Historical dynamics:",
    "Current metrics and concerns:",
    "Reforms implemented since the crisis:",
    "Remaining issues and pressures:",
    "Policy prescription (explicit recommendation):",
    "Rationale:",
    "Benefits of an integrated capital market:",
    "Key reform areas to unlock capital markets union (three highlighted priorities):",
    "Strategic ambition:",
    "Restated prescription: complete the banking union and the capital markets union to strengthen the euro area’s economic ecosystem.",
    "Closing quotation and metaphor:",
    "Final plea: Europe’s courage, creativity, and perseverance should be trusted to deliver further integration and resilience.",
    "[Christine Lagarde](https://www.imf.org/en/About/senior-officials/Bios/christine-lagarde)",
    "[France and the IMF](http://www.imf.org/external/country/FRA/index.htm)",
    "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Staff Discussion Note](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2018/01/23/Inequality-and-Poverty-across-Generations-in-the-European-Union-45137)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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