Making the euro area function better – the banking union and fiscal framework

A weak and fragmented financial sector is a risk for recovery and sustained growth in Europe. Bank capitalisation has improved, but high and rising non-performing loans and fragmented capital markets are weighing on credit growth. Heterogeneous supervision has fostered some forbearance at national levels, while reduced fiscal space limits scope for bank resolution and restructuring. As an outcome of the ongoing ECB’s comprehensive assessment of banks’ balance sheets, banks should be recapitalised or resolved if needed, according to the quantitative results. To reduce systemic risks and enhance financial integration the banking union with common supervision, resolution and rule books needs to be put in place soon. Supervisory rules should also be considered to better reflect risk and sovereign exposures.Several agreements have been concluded to reinforce fiscal and economic governance by amending surveillance procedures, sharpening sanction mechanisms and setting intermediate fiscal and economic targets and adjustment procedures. For these mechanisms to work properly it is essential to further develop national fiscal frameworks. This should include the introduction of comprehensive medium-term budgeting that is able to identify future spending and revenue pressures and risks, independent fiscal councils with a broad mandate to evaluate fiscal policies, and effective mechanisms to correct deviations from fiscal targets.