THE EUROPEAN CENTRAL BANK AND EUROPEAN INTEGRATION, Speech by Mr. George Zavvos, Deputy Minister of Finance responsible for the financial system

4th Simulation European Central Bank Event, organised by Get Involved Athens, 11 December 2020

I welcome you all and I applaud the excellent initiative for the organisation of this conference. Thank you for inviting me to speak at this event as it gives me the opportunity to discuss the pivotal role of the European Central Bank in European integration.


As you know, the ECB responsibilities include the definition and exercise of monetary policy, the management of the official foreign reserves of the euro area and the supervision of the smooth operation of the payment systems; these responsibilities traditionally belong to central banks. The ECB, together with the 19 national central banks of the countries that have adopted the euro constitute the Eurosystem, the primary purpose of which is to maintain price stability, a purpose "inherited" from the German central bank, the Bundesbank.

At the same time, the ECB supports the general economic policies of the euro area countries to achieve our common goals and to ensure the stability of the financial system. Therefore, the ECB activities are inextricably linked to the course of the economy of each Member State. The ECB implements standard monetary policy operations as well as extraordinary ones, such as the provision of Emergency Liquidity Assistance (ELA), to Member States.

Many measures have been taken over the past decade to address the risks stemming from the financial crisis with the objective to support the economies of the euro area Member States: quantitative easing, securities schemes, targeted lending, long-term refinancing to ensure adequate liquidity.

Let us also remember the very recent massive support programs during the Covid-19 pandemic crisis, through government bond market (PEPP) and long-term refinancing operations (TLTRO). Just yesterday (11/12/2020), the President of the ECB, Ms Christine Lagarde, announced the extension of PEPP by €500 billion until March 2022.

In our country in particular, the ECB has played an additional supporting role during the fiscal adjustment period.
Since the beginning of the crisis, the ECB has participated in all negotiations and discussions, until today that the country, after exiting the Economic Adjustment Programs, is in a state of enhanced supervision.

Also important was (and is) the ECB's role in giving an opinion on legislative initiatives taken during the three Economic Adjustment Programs (or memoranda, as they are commonly referred to). The establishment of the Hellenic Financial Stability Fund and the changes in the law governing its operation, the framework for loan arrangements (known as the Katseli law), the out-of-court settlement, the changes in the law on DTC, the changes in enforcement, have all been examined by the ECB.

The ECB played an essential role in the discussions on the restructuring of the public debt (known as the PSI), as well as in subsequent initiatives for the implementation of the short- term and medium-term measures for the reduction of the Greek debt (by repurchasing bonds and changing interest rates to EFSF / ESM loans).

However, the ECB is not limited to these activities.


In order to avoid new financial crises such as the one in 2008, the EU aimed to break the link between sovereign and bank debt, which led to the massive rescue of banks by taxpayers in the Member States.

The euro area crisis was a banking crisis and highlighted the failure of dominant economic theories, such as the theory of optimal expectations and the doctrine of market self- regulation. In addition, although Professor Mundell's theory of optimal currency area (which laid the foundation for the creation of the euro area) predicted the intensification of trade and the possibility of external asymmetric shocks, e.g. from the rise in oil prices, it was agnostic to the acceleration that the introduction of the single currency would bring to financial integration , especially in the wholesale markets, and to the risk of financial fragmentation of a monetary union in crisis.

In the euro area, the financing of the banks of the periphery by banks of central Europe accelerated the systemic crisis, as there was a lack of supervision of banks and markets at European level. Furthermore, this theory did not predict that a vicious circle could be created (the "doom loop", as it is called) between the public sector and banks: either the over- indebted public sector brought down the banks (in the case of Greece), or the over-indebted banking sector brought down the State (in the case of Ireland).

That is why in 2012 the path to the banking union, which had already begun in the mid-1980s with the introduction of the single banking license in 1992, advanced rapidly. The European Banking Union has 3 pillars: the joint supervision of the banking system, the joint management of banking crises and a common deposit protection system, with a horizon of completion in 2024.
The ECB played an active role in this path towards the banking union. Respecting its mandate and with a clear separation from its monetary responsibilities, it has been exercising the prudential supervision of the euro area banks since 2014 together with the national supervisory authorities, through the Single Supervisory Mechanism (SSM), the first pillar of the EBU, which after 7 years of operation has proven to be extremely effective.

However, despite the clear success of SSM we still have many steps to take until the successful completion of the banking union. The second pillar of the EBU, the Single Resolution Mechanism, does not yet appear to be sufficient, as there are difficulties in implementing it, as evidenced also by the recent pandemic crisis, to deal with systemic banking crises. At the same time, the third pillar of the EBU, the European deposit Insurance Scheme has not been adopted yet.

For our part, we actively support the completion of the three pillars of the EBU, which are fully interconnected, in order to make them operational and to complete the vision of achieving a real banking union at European level.

However, the EBU is currently facing two major challenges, both a result of the euro area crisis: a) the large percentage of non-performing loans and b) the fragmentation of the single market, due to the ring-fencing actions taken by Member States' national authorities.


In light of the above, the reduction of non-performing loans (NPLs) is essential both for the functioning and the completion of the EBU. Unfortunately, our country was in the spotlight due to its large percentage of NPLs, disproportionate to other euro area countries, which resulted to the under-performance of the banking system.

This has all changed with the successful implementation of the recently adopted "Hercules"
Asset Protection Scheme.

Hercules was one of the top reforms of the Greek government; through this scheme the NPLs of the banking system are reduced by €30-35 billion. It is a systemic solution that reorganizes and strengthens the banking system; it is also a market-based solution which means that it does not impose any burden on Greek taxpayers. Within a year, three of the four systemic banks have joined Hercules and we are expecting the fourth to join before the end of the year. This, in the midst of an unprecedented pandemic crisis, proves the confidence of international investors in Hercules and in the country's prospects.

Hercules has been applauded by all European institutions, as evidenced also by the statements of the SSM Chair, Mr. Andrea Enria, in his recent interview with ERT. The European supervisor said that, thanks to Hercules, a significant reduction in NPLs has been achieved and that the program should continue based on our planning, while urging the banks to further accelerate the consolidation of their balance sheets.
The second goal remains the elimination of all other barriers that still fragment the single banking market today. The stabilization of the EU banking system will strengthen the single market, reversing the trend of fragmentation which hinders the free flow of capital and the provision of banking services, thereby imposing disproportionate costs on consumers. Banks should operate on a cross-border basis as a normal mechanism for transferring monetary policy and providing liquidity to the real economy, i.e., to small and medium-sized enterprises, to businesses and entrepreneurs.

The EBU, once completed, will be a critical shock-absorption mechanism that will shield the financial systems of the countries at periphery of the euro area, which are usually subject to asymmetric shocks, and will mitigate the long-standing imbalances triggered by any crisis.


That said, the multidimensional role of the ECB does not end here, as the financial system is constantly evolving, with the emergence of new actors and activities.

As announced by the ECB and other European institutions, the primary objective is a more inclusive and sustainable economy and society, that leverages on new technologies and digitization. These two pillars are central axes also in the strategy of the Greek government.

Take for example the green transition. Disclosure requirements for bond issuers and credit ratings involving climate risk have emerged as the two main means by which the ECB seeks to address climate risk and green monetary policy. The Greek government also puts emphasis on green and sustainable finance issues, with initiatives aimed at promoting new financial instruments. We are designing an innovative framework of incentives for Greek companies to issue and use green bonds. This new tool will modernize the Greek capital market and favor investments by small and medium-sized enterprises, such as the so-called FinTech companies.

At the same time, the coronavirus pandemic, with all the challenges it has brought, has an unprecedented dynamic and can accelerate efforts to transform the financial system. See the changes in payment methods: In recent years, the digital revolution has led people to significantly change their payment habits - the use of a card, a phone or even a smartwatch for payments is becoming more and more common. According to a recent ECB study, almost half of the adults in the euro area now prefer to pay digitally and this trend seems to have been accelerated further during the coronavirus pandemic.

As digitalisation leads to changes and we note e.g. digital currencies gaining ground, fiat currencies such as the euro also need to be rediscovered so that the public goods they provide remain fully available in the digital age. We should therefore be prepared to support the ECB issuing a digital equivalent of banknotes. A digital euro will complement cash: together they will offer access to simple, free payment methods. Of course, the digital euro should not be confused with cryptocurrencies. Our country has already regulated the supervision of
cryptocurrencies for money laundering purposes and we are proceeding with a coherent plan for their comprehensive supervision and their relationship with fiat currencies, in parallel with the discussions on the issuance of a digital euro.


A key characteristic of the ECB, which allows it to exercise all of the above tasks effectively, is its independence. This independence means that neither the ECB nor national central banks or any member of the decision-making bodies of these institutions can seek or receive instructions from EU institutions or bodies, from any government of an EU Member State or from any other organisation. This obligation is set out in the Treaty on the Functioning of the EU.

Independence is a prerequisite for the ECB's success in conducting monetary policy and prudential supervision of banks, as decisions are made on the basis of maintaining price stability and the stability of the financial system in the long run, and not on the basis of short- term political expediencies.

However, this independence does not imply lack of any control and accountability.

Key components of all European institutions and bodies are transparency in the way they operate and increased accountability to either the European Parliament or the European Court of Auditors.

The latter, with its 2018 report on the operational efficiency of the ECB's crisis management for banks, issued recommendations for the better exercise of the ECB's responsibilities. It is particularly interesting that it emphasized the lack of access to documents which is necessary for drawing conclusions as to the effectiveness of the ECB's crisis management activities.

Of course, transparency and accountability should in no way be confused with questioning the independence of the institution; nor, of course, control (and in fact control of performance) can refer to the monetary policy.

However, it is interesting to examine the two-way relationship between the ECB and the Member States, either individually or acting within the EU as the Council.

Ensuring financial stability presupposes, in addition to the uniform application of EU law (which is guaranteed by the Court of Justice of the EU), consistency in the measures and policies of the Member States.

This coherence is achieved by the obligation of the EU and the Member States to consult the ECB on every proposed legislative measure on matters falling within the remit of the ECB.

The ECB's advisory role first began in 1999 and is now enshrined in the Treaty on the Functioning of the EU.

Undoubtedly, in this way a continuous monitoring of the proposed EU and national legislation is achieved that prevents the introduction of measures that could undermine confidence in the European financial system. At the same time, it is a recognition of the independent functions of the European Central Bank and, for some, an essential supervisory power that affects the sovereignty of Member States.


Apart from the above, there is an additional dimension worth examining. The delimitation between monetary and fiscal policy has in recent years been subject of political debate in Member States with particular constitutional sensitivities, which in turn want to define the independence of the ECB and delineate their own powers and sovereignty, challenging in practice ECB decisions to protect financial stability. These tensions are anticipated in the European architecture, where aspects of a monetary federation, expressed by the ECB, and aspects of a fiscal "confederation", expressed by the Member States, coexist dynamically.

A very typical example was the Gauweiler case. Amongst all the emergency ECB financial assistance measures I mentioned earlier, the so-called Outright Monetary Operations (OMT) program was the most controversial. Although it did not go beyond a single communication and was never implemented, the proposed measure caused controversy within the euro area over its estimated impact not only on monetary policy but also on the economies of the Member States. It was argued that the ECB went beyond its competences as defined in the Treaties and the extent of its discretion in conducting monetary policy, but also that it violated the prohibition of monetary financing. This skeptical attitude was expressed mainly by Germany, where the German Constitutional Court referred a question to the Court of Justice of the European Union for the first time. Finally, in the Gauweiler judgment, the CJEU ruled that the OMT program was in conformity with Union primary law.

However, the case revealed shortcomings in the functioning of the euro area, such as the coexistence of a central monetary policy and decentralized fiscal policies, which underscored once again the importance of achieving European integration in this area. I note that that just the day before yesterday (9/12/2020) the European Court of Auditors made the same finding where, assessing the measures taken by the Member States to address the pandemic crisis, it pointed out the prominent risk of widening the economic gap between Member States (North-South), due to the heterogeneous impact of the pandemic in the Member States and the differences in their ability to support their economies.

The prospect of completing the European Banking Union and strengthening a fiscal union requires bold political decisions. Important decisions concerning the security and supply of European "public goods", such as financial and economic stability, must be taken at EU level after thorough political consultation, a "public dialogue" as Amartya Sen would say, to ensure the necessary democratic legitimacy.


Europe is looking for the most effective way to restore the disturbed relationship between markets and politics, in order to promote democracy at supranational level.

As the legendary European central banker, the Italian Tommaso Padoa-Schioppa who passed away exactly ten years ago on 18/12/2010, said, the completion of the European Banking Union would be the wisest decision. This is all the more true at a time when we are experiencing tremendous geopolitical and economic changes, with the survival of smaller States now being dependent on a plethora of factors and not just on their economic performance. He was talking already in 1999, at the time the ECB was shaped, about the "unbearable loneliness of the European Central Bank", stressing the historical oxymoron whereby a monetary authority was not matched by a State/ federal entity.

It seems to me that the most important and the most revolutionary change that the two crises, of 2008-2009 and today, have already brought along, is that they highlight the necessity of a political Europe vis-à-vis the markets. This was reflected with the European Banking Union during the first crisis and with the Recovery and Resilience Fund during the second. In both cases, the ECB has been a leading federal body that has nothing to envy from those of other mature federations. In the midst of the two major crises we have been through, the ECB has demonstrated that it can play its role successfully and make the greatest contribution to European integration.

I wish you good luck in your conference!