European Central Bank (ECB) President Mario Draghi said on Monday the 17-country eurozone must move swiftly to set up a joint fund to restructure and wind down troubled banks, claiming it is a necessary step to stabilizing the financial system.
The fund should be financed by levies on financial institutions to ensure it will not have to tap taxpayers’ money over the medium term, guaranteeing that “resolution costs are first and foremost borne by the private sector,” he told European lawmakers.
The fund must be able to make timely and impartial decisions on how best to deal with a troubled bank, independently of national considerations, he said.
That would help to break the “perverse link between sovereign and banks,” Draghi said, referring to the current situation, where rescuing troubled banks drags down eurozone nations with already weak public finances.
However, establishing such a joint fund has met with skepticism in countries like Germany, Europe’s biggest economy, where politicians fear their countries’ money could be used to bail out banks in other countries. European leaders have called on the European Commission, the executive arm of the 27-nation EU, to draft a proposal for such a fund, as many details of its planned implementation remain unclear.
Draghi said the fund was the logical and necessary step to complete a banking union once the ECB takes over the oversight of the bloc’s banks. That step is planned to take effect next year, but many details on the relevant legislation have yet to be hammered out.
“We have to find the proper equilibrium between national and centralized supervision,” Draghi told the lawmakers.
In the parliamentary hearing, Draghi also brushed aside worries over a so-called currency war, in which countries try to lower their national currencies’ values to gain a competitive edge in exports. The euro has recently risen sharply against the US dollar and the yen, among other currencies, but Draghi said those movements remain within the recent historical average.
The exchange rate is not among the bank’s policy targets, but it is taken into account as an important influence on economic growth and inflation, he said. The euro’s appreciation, combined with the sluggish economy, risk pushing inflation down more than expected, he added.
“We will assess [the situation] according to price stability,” he said.
He also reiterated the ECB’s economic outlook, warning that the beginning of the year will remain weak, but that the bank expects “a gradual recovery later this year.”
The ECB forecasts the eurozone’s economy will shrink 0.3 percent this year.