Euro zone bailout fund head calls for more risk sharing in euro zone

November 21, 2016 7:35 AM EST

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ROME (Reuters) - The euro zone needs more risk sharing in the financial sector to accelerate economic growth, the head of the euro zone bailout fund Klaus Regling said on Monday in remarks that are likely to face strong opposition in his native Germany.

Regling said financial integration, on the rise since the euro was created in 1999, took a big step back during the two consecutive financial crises that hit the 19 countries sharing the euro from 2008 onwards and that cut economic growth.

He estimated that the drop in capital mobility between euro zone countries cost 4 percentage points of gross domestic product and 0.5 percentage points in terms of potential growth.

"The lack of risk sharing ... is a key challenge in this respect. It is the one economic priority on top of my list, when I think about the gaps that should be filled to make EMU more robust, and the euro area economy more resilient," he said.

The Economic and Monetary Union (EMU) -- the single euro currency -- is the biggest political and economic project of the European Union, but while the monetary part of it has been set up and works well, the economic union is yet to be completed.

"Now if a lack of risk sharing – particularly through the capital markets channel – is the main challenge, a higher degree of financial integration is the obvious answer," he said.

Regling said that to boost financial integration banks had to aggressively reduce the number of non-performing loans, perhaps helped by fiscal incentives, and cut costs by closing branches, better use of technology and sector consolidation.

The euro zone also had to complete its banking union project by providing a financial backstop its Single Resolution Fund for banks and setting up a European Deposit Insurance Scheme -- an idea Berlin is adamantly against.

"It is a controversial issue, because the current national systems are very different, and some countries would need to reduce legacy issues with their banks before it can be put in place," Regling said.

"It will therefore take a while. But it is a crucial step that would enhance confidence and thus resilience," he said.

Finally, the euro zone should pursue the Capital Markets Union idea put forward by the European Commission which entailed a harmonization of corporate, insolvency ad tax laws across Europe to make cross-border investment easier.

"A higher degree of financial integration would be good for the private sector, for the real economy and for the good functioning of EMU," Regling said.

"It would open up bigger markets, bring more opportunities, and lead to more risk-sharing. It would also enhance economic resilience," he said.

(Reporting By Jan Strupczewski)



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