I thank the Chairman and honourable Members of Parliament. I am happy to be back in Dublin and honoured to be invited to speak to the Oireachtas. On this occasion I am joined by my colleague, Mr. Philip Lane, whom committee members meet regularly in his capacity as Governor of the Central Bank of Ireland. Let me remind the joint committee, as a housekeeping detail, that while the European Central Bank, ECB, is accountable to the European Parliament, we also greatly value our exchanges with national parliaments. In September, as they may recall, some members met the chairperson of the supervisory board of the Single Supervisory Mechanism, Ms Daniele Nuoy, in Frankfurt when they discussed the ECB's supervisory policies.
With full respect for the functional separation between the ECB's monetary policy and its supervisory tasks - this has to do with what I can and cannot say - this is an opportunity to discuss monetary policy and policies to make the euro area economy and its constituent parts more resilient. In that respect, I expect an open exchange which will give us a chance to listen to and better appreciate each other's positions. I am conscious that I am speaking in a country that went through a severe crisis during which the Irish people made tremendous efforts. Of course, we all and I personally have great respect for them, but we should also acknowledge that those efforts are now paying off.
Ten years after the start of the global financial crisis, the euro economy is performing well. It has been doing so for some time. We have now seen 22 consecutive quarters of economic growth, while over 9.2 million jobs have been created. The unemployment rate has declined to 8.1%, its lowest level since November 2008. The Irish economy has seen particularly strong expansion in recent years. It is now growing at the fastest pace of any euro area country. The rate of unemployment has been falling too and now stands well below the euro area average. It is all the more impressive, given the severe crisis Ireland went through and the legacies with which it is dealing, including high private debt and arrears.
Looking ahead, while some sector specific data and selected survey results have been somewhat weaker than expected, the latest incoming information also suggests the broad based expansion in the euro area, including Ireland, is set to continue. Against this background, the rate of inflation in the euro area is expected to continue to converge towards the ECB's objective of being below or close to 2% in the medium term. Getting to this point has required considerable monetary policy support. The euro area is looking back on several years of exceptionally low interest rates and what we call unconventional monetary policy measures. The ECB's key interest rates have been at unprecedented low levels since 2009 and supported by a series of unconventional measures introduced in the face of a protracted recession and persistently low inflation. While we are now at the point where we anticipate, subject to incoming data confirming our medium-term inflation outlook, we will end net asset purchases at the end of the year, a significant monetary stimulus will still be needed to ensure the continued sustained convergence of inflation towards levels below but close to 2% in the medium term. However, even after we end our net asset purchases, a monetary stimulus will continue to be provided by the guidance we have given, namely, we expect key interest rates to continue at their current level, at least through the summer of 2019, and to maintain the stock of assets on our balance sheet by reinvesting maturing bonds purchased under the asset purchase programme for an extended period of time after the end of our net asset purchases.
The overall favourable outlook and our still accommodative stance should not invite complacency. Although, on the whole, the risks surrounding the euro area growth outlook can still be assessed as broadly balanced, the risks related to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. More specifically, we see a growing willingness to question multilateralism which has underpinned global growth since the end of the Second World War. The protectionist trade measures implemented may have had very limited effects thus far, but the escalation of trade tensions is certainly undermining confidence.
The financial stability environment in the euro area overall remains favourable, but it has become somewhat more challenging in recent months. The results of the European stress test published last Friday show that euro area banks are increasingly resilient to financial shocks. This also reflects the continuing economic expansion, which has strengthened private and public balance sheets alike. Still, there are risks. These include liquidity risks in the non-bank financial sector that could be transmitted to the broader financial system. Developments in this area should be closely monitored, and the regulatory and supervisory framework for non-banks needs to be strengthened.
Asset prices also require close monitoring. While there is no compelling evidence at this stage of overstretched asset valuations at the euro area level, we are seeing some localised risks. However, euro area monetary policy is not the appropriate tool with which to address such risks. They call instead for targeted macroprudential policies, which can be tailored to local and sectoral conditions. The recent decisions by the Central Bank of Ireland are an example of how macroprudential policy can promote financial stability.
The other risk in our minds is, of course, Brexit. With negotiations ongoing and less than five months to go until the United Kingdom’s departure from the European Union, it is essential to prepare for all outcomes, including a no-deal scenario. While the direct trade effects of a hard Brexit would be limited for the euro area as a whole, Ireland is more exposed due to its very close trade relations with the UK. We also see limited overall risks to euro area financial stability. Without sufficient mitigating action, however, a cliff-edge Brexit could have an adverse impact in certain areas of centrally cleared derivatives markets.
Sources of risk from outside the EU have increased since May. A stronger US dollar and heightened trade tensions triggered renewed stress in a number of emerging market economies.
Thanks to our collective efforts at the European and national level, we have come a long way since the start of the financial crisis. However, to strengthen our economies and preserve financial stability, we need to go further.
Let me highlight in particular some of the concrete steps in the area of financial integration that we need to take at the European level. First, we need to complete the architecture of the banking union. The benefits of having a euro area supervisor are clear when we look at banks’ strengthened balance sheets. However, more needs to be done to reduce the risks for citizens as both taxpayers and depositors, and to break the remaining link between banks and national governments. In addition to the adoption of a banking package which is currently under negotiation among EU legislators, a genuine banking union needs further regulatory harmonisation, for instance through greater reliance on regulations instead of directives. In particular, unwarranted national options and discretions still stand in the way of a level playing field for banks. At the same time, we need to establish a common backstop to the Single Resolution Fund and lay the groundwork for the creation of an effective European deposit insurance scheme. Making significant steps in these areas is a precondition for a truly integrated euro area banking system and single money.
The second thing we need to do is build a true single market in capital. To be robust, the capital markets union needs effective regulation and supervision, for example with investment firms and clearing. Not least given the United Kingdom's imminent departure from the European Union, we need to make concrete progress on this agenda and complement it with an ambitious, long-term vision.
Recent Eurobarometer data show that support for the euro stands at a record high of 77% among euro area citizens and a large majority believe that their country’s membership of the EU is a good thing. Support for the European project is particularly strong in Ireland, where with 88% of citizens the single currency enjoys the highest level of support in the Union. Europe has to repay this trust.
We face important global challenges that are naturally causing concern among the people of Europe, especially those who feel left behind. Common institutions and collaboration among member states give Europe a strong voice in the world. More important, they make it possible for us to find effective answers to joint problems; we are stronger together. I thank members for their attention.
