Economic and Monetary Union: Understanding EU Financial Stability

Economic and Monetary Union

The Economic and Monetary Union (EMU) is an instrument to further the objectives of the European Union and improve the lives of citizens in the Member States. The operations and management of the EMU are designed to support sustainable economic growth and high employment through appropriate economic and monetary policy-making. It involves four main economic activities:

• Implementing an effective monetary policy for the euro area
• Coordinating economic and fiscal policies
• Ensuring the smooth operation of the single market
• Supervising and monitoring financial institutions

Monetary Policy

Monetary policy involves influencing interest rates and exchange rates to benefit a country's economy. It is managed through the European Central Bank and the national central banks, both of which constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability, safeguarding the value of the euro.

European Central Bank

The European Central Bank (ECB) is responsible for the prudential supervision of credit institutions located in the euro area and participating non-euro area Member States. It contributes to the safety and soundness of the banking system and the stability of the financial system. The ECB strives for the highest level of integrity, competence, efficiency, and accountability.

Eurosystem

The Eurosystem comprises the European Central Bank and the national central banks of the Member States whose currency is the euro. Its primary objective is the maintenance of price stability for the common good. It places importance on credibility, trust, transparency, and accountability. The Eurosystem is responsible for:

• Defining and implementing monetary policy
• Conducting foreign exchange operations
• Holding and managing the euro area's foreign currency reserves
• Promoting the smooth operation of payment systems

Fiscal Policy

The Stability and Growth Pact (SGP) is a set of rules designed to ensure that countries in the EU pursue sound public finances and coordinate their fiscal policies. It includes:

• Prevention: Binding EU governments to their commitments towards sound fiscal policy and coordination by setting each one a budgetary target (Medium-Term Objective, MTO).
• Correction: The Excessive Deficit Procedure (EDP) ensures the correction of excessive budget deficits or excessive public debt levels.
• Six Pack: The SGP was made more comprehensive and predictable with a major enhancement of the EU's economic governance rules through a collection of new laws.
• Two Pack: Reinforces economic coordination between Member States and introduces new monitoring tools.
• Fiscal Compact: Part of an intergovernmental treaty known as the Treaty on Stability, Coordination, and Governance.

Banking Union

The Banking Union allows for the consistent application of EU banking rules in the participating countries. The need for a Banking Union emerged from the financial crisis of 2008 and the subsequent sovereign debt crisis. The purpose of the Banking Union is to make European banking more transparent, unified, and safer. It aims to break the link between sovereigns and banks. It has three pillars:

1. Single Supervisory Mechanism (SSM): Comprises the ECB and the national supervisory authorities of the participating countries. Its aims are to ensure the safety and soundness of the European banking system, increase financial integration and stability, and ensure consistent supervision.
2. Single Resolution Mechanism (SRM): Ensures the efficient resolution of failing banks with minimal costs for taxpayers and to the real economy. The Single Resolution Board is the central decision-making body of the SRM.
3. European Deposit Insurance Scheme (EDIS): Still a proposal. It represents a further step towards reinforcing financial stability by further weakening the link between banks and their national sovereigns.

European System of Financial Supervision

The European System of Financial Supervision (ESFS)'s main task is to ensure consistent and appropriate financial supervision throughout the EU. It includes:

• Macroprudential Supervision: The European Systemic Risk Board (ESRB) is responsible for macroprudential supervision of the financial system in the EU. Its main tasks include collecting and analyzing relevant information to identify systemic risks and issuing recommendations for action in response to the risks identified.
• Microprudential Supervision: European Supervisory Authorities (ESAs). The ESAs work primarily on harmonizing financial supervision in the EU by developing the Single Rulebook, a set of prudential standards for individual financial institutions.

Capital Markets Union

The Capital Markets Union (CMU) is a plan to mobilize capital in Europe. It will channel it to all companies and infrastructure projects that need it to expand and create jobs.