Mario Draghi warned against exaggerating the tradeoffs between risk sharing and risk reduction in the euro zone, arguing it has hampered monetary policy transmission.
“Since a long time we have reached an impasse on key issues including on completing the banking union and deepening fiscal policy coordination,” the European Central Bank President said in Frankfurt on Wednesday. “This has been perpetuated by two alleged dichotomies — the first is the notion that to complete banking union, risk reduction needs to precede risk sharing. The second is the idea that deepening risk-sharing through the private sector should take precedence over increasing public risk-sharing.”
Draghi’s comments signal heightened concern about a lack of progress in Europe, amid rising populism and despite EU leaders acknowledging that the euro area eventually needs some kind of joint fiscal capacity and common deposit insurance. He argued that markets typically panic when there is no element of risk sharing, and that appropriate backstops help stabilise market expectations.
“The notion that we face inherent tradeoffs is false,” he said. “Properly designed they should in fact be complements.”
Draghi spoke at a colloquium for the ECB’s outgoing chief economist Peter Praet, who he said has been “tireless” in serving Europe by helping the ECB meet its price-stability mandate.
“There are some who claim to be committed to the European project, but they do so either in a sort of naïve way
by espousing noble but unattainable ideas or in a cynical way,” he said. “But there are others who look honestly at the challenges Europe faces” and “who work to do something about them.”