As QEs can reduce the short term pain and pressure brought by adjustments, there is a real risk the implementation of the much needed reforms in the private sector and the fiscal reform in the public sector could be delayed, or dropped altogether. This means the fundamental cause of the imbalances in the global financial system is not being addressed at all. The problem is particularly acute in the fiscal positions of many advanced economies that have built up high levels of public debt. According to the “Ricardian Equivalence” theory, when people believe the fiscal positions of their governments are unsustainable and that at some future stage the governments have no choice but to raise taxes to pay back the debt, this will materially curtail the citizens’ desire to spend and invest now because they need to save more to prepare for the “rainy” days ahead. (c) Finally, the third important cost or risk factor is the misallocation of resources and investments: Given the near zero interest rates and abundant liquidity in the financial system, it is to be expected that the asset markets, especially the stock and housing markets, will benefit. With US stock markets continually reaching historical highs and with a strong rebound in the housing market, the positive wealth effects should help boost consumption and investment.
Indeed, we at the ECB consider it of the utmost importance to ensure that the participation of the outs occurs on equal terms as the Euro Area countries. On resolution, we need to find creative solutions to ensure a level-playing field between ins and outs. This holds also true for the backstop for the single resolution fund which is currently the subject of much discussion. Taking part in the Banking Union from the beginning would bring many benefits. Having a chair at the table now allows participants to steer the practical implementation of the SSM – for example the development of the supervisory manual, guidelines and general instructions, as well as benefit from the “healing effect” that the comprehensive assessment should bring. Let me make a third remark: The banking union should be about strengthening the internal market, rather than fragmenting it. Both the single currency and the single market are key pillars of growth and prosperity in Europe. Both should be maintained and enhanced. Hence, the banking union should not create new barriers within the internal market. If countries choose not to join, they should not be discriminated against. Two safeguards will be crucial in this regard: having a single rulebook that sets the same standards for all, and having a strong and effective European Banking Authority with a fair representation of the outs. The relationship between banking and fiscal union Let me now turn to the relation between banking union and fiscal union.