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Germán López Espinosa, Professor at School of Economics and Business Administration of the University of Navarra

Antonio Moreno Herrera, Professor of Economics and Business Administration, University of Navarra, Spain School

Vítor Constâncio's bequest

Fri, 01 Jun 2018 13:25:00 +0000 Published in Cinco Días

Yesterday, May 31, Vítor Constâncio completed his last day as Vice-President of the European Central Bank (ECB), position which he has held for the last eight years. No less than thirty-four years working in Central Banks and eighteen years as a member of the European Central Bank's Governing Council committee attest to one of the best careers in Europe.

Constâncio has faced many challenges as Vice-President of the ECB, many of them during the European sovereign debt crisis following the great global recession of 2008. On all these fronts, Constâncio has demonstrated his enormous stature as an economist and convinced Europeanist. We will dwell briefly on three of the positions he has defended, together with the President and committee Executive Board of the ECB.

First, during the sovereign crisis in southern European countries, the market began to seriously distrust our single currency, the Euro. These doubts pushed up sovereign debt risk premiums to unsuspected levels, severely damaging national public accounts and the competitiveness of our companies, given their high financing costs. In a context in which the very continuity of the Euro was called into question, and in which national governments found themselves without resources to convince the markets, the ECB communicated its clear decision to purchase public debt from area euro countries in order to alleviate market tensions. This decisive statement was the triggering event for the recovery of the European Economics , which we still enjoy today. From July 2012 onwards, funding costs came down convincingly and European countries started to recognize themselves in the ECB. The Euro saved its first matchball and Mario Draghi and Vítor Constâncio had a lot to do not only in the decision but in the effective message that everything necessary would be done to save our single currency project .

Secondly, within post-2008 financial regulation, innumerable proposals have been debated, all of them interesting, but with very disparate possible effects. It is worth recalling the proposal on sovereign debt limits that was intended to be imposed on commercial banks. This proposal, which seemed well-intentioned in principle - to avoid concentrations of public debt on bank balance sheets in order to avoid the diabolical sovereign-banking loop - would, however, have had very negative consequences for the countries most affected by the European sovereign debt crisis. De facto, so much sovereign debt would have been taken off the balance sheet that public - and again, private - financing costs would have risen to unsustainable limits, with the consequent deterioration of banks' balance sheets, thus aggravating the crisis even further. Spain would have suffered greatly if the banks had had to sell off sovereign bonds for an amount close to 200 billion euros.

Thirdly, Vítor Constâncio has been one of the great advocates of the necessary Banking Union as part of the great European project . This project -which in fact configures a new European banking ecosystem- is based on three pillars: single supervision, single resolution mechanism and European deposit insurance. The third pillar is currently being defined, for which it is considered necessary to reduce the risks on bank balance sheets as a prior step to mutualize European risks and thus make our European banking system stronger. Moreover, since banks' contributions to the European deposit guarantee scheme would be risk-adjusted, solidarity between countries is significantly reduced.

The tireless and priceless work of a wise man like Vítor Constâncio has been a fact until the last day of his mandate. In the face of the financial turbulence unleashed by the current political crisis in Italy, Vítor Constâncio has clearly warned of the consequences of a new sovereign debt crisis if the country abandons the fiscal discipline and the containment of the public expense .

Finally, Mr. Vítor has brilliantly explained to us what his priorities would be regarding the reforms he considers necessary: accepting that the ECB cannot have excuses for not intervening in the sovereign bond market in the face of a severe liquidity crisis; creating a centralized fiscal stabilization function for the macroeconomic management , including a stabilization fund; introducing the European sovereign bond; fill in the Banking Union; advancing in the creation of the Single Capital Market and improving the corresponding rules and regulations in order to discipline the fiscal policies of the countries.

Vítor Constâncio's bequest combines commitment to the European project , coherence in macroeconomic policies and financial aid to the countries most in need. The Spanish society owes much to his excellent work at the head of the ECB, Thank you very much! Vítor.