The outgoing President of the European Central Bank (ECB) Mario Draghi called for “a euro area fiscal capacity of adequate size and design” in a farewell speech here on Monday.
Draghi said the current low interest rates are not delivering the same degree of stimulus as in the past, since the rate of return on investment in the economy has fallen.
“Monetary policy can still achieve its objective, but it can do so faster and with fewer side effects if fiscal policies are aligned with it,” the Italian economist said at the end of his eight-year term.
Draghi suggested that the possible euro area fiscal capacity should be “large enough to stabilize the monetary union, but designed not to create excessive moral hazard.”
However, he pointed out that there will be no perfect solution and moral hazards can hardly be reduced to zero. “The road towards a fiscal capacity will most likely be a long one.”
He added that the building of a capital markets union would lead to greater risk-sharing in the private sector and considerably reduce the fraction of risks that need to be managed by a central fiscal capacity.
The farewell event on Monday was attended by prominent political figures including German Chancellor Angela Merkel, French President Emmanuel Macron, Italian President Sergio Mattarella, and ECB’s next chief Christine Lagarde. Lagarde will officially take office on Nov. 1.
This year also marks the 20th anniversary of the euro and the monetary union. Reflecting on European integration, Draghi emphasized the need for member countries to work together to meet people’s needs for security and prosperity.
“In a globalized world, sharing sovereignty is a way to regain sovereignty,” Draghi added.