Bundesbank President Joachim Nagel used his speech at the 34th European Banking Congress in Frankfurt am Main this year to call for a strong and united Europe, which is necessary to navigate the challenges of an increasingly fragmented world.

He spoke of how the world has changed, with autocratic regimes having gained influence, and some not shying away from military aggression. “Russia’s terrible attack on Ukraine made us painfully aware that the peace dividend after the end of the Cold War has gone,” the Bundesbank President remarked. He added that populist movements are posing a threat to our liberal values. The European Union has become a common scapegoat for populists, he said, which makes it more difficult to promote further European integration. And yet Europe is facing major challenges.

Joint action is important in times of economic challenges

Events such as the pandemic and geopolitical tensions have laid bare the risks involved in unilateral trade dependencies. On top of this, labour scarcity is on the rise due to demographic change, and there’s the need to press ahead with the digital and green transitions. Completing his rundown of European challenges, Mr Nagel mentioned the outcome of the recent US elections, which, he said, could seriously challenge Europe both politically and economically.

It is clear that we will only rise to the challenges we face by acting together. “Europe must stand united. Europe must not allow itself to be divided,” Mr Nagel insisted, and pointed out that this requires a readiness for compromise on all sides. The completion of the European Single Market has a key part to play.

Close cooperation between France and Germany

The fact that financial markets are still fragmented is problematic as well. We have to “tear down the invisible walls obstructing financial market integration”, Mr Nagel said, illustrating his point by turning the spotlight on the banking union, which still lacks a joint deposit guarantee scheme as well as a solution to the “doom loop” created by the links between sovereigns and banks. For things to move forward, there needs to be a willingness to compromise.

In his speech at the Congress, François Villeroy de Galhau, Governor of the Banque de France, addressed, among other things, Europe’s acute growth problem but commented that Europe is still in a position to strengthen its economic growth. Central banks, he said, have a duty to assist policymakers by providing their expertise on issues of structural policy, though it is of course ultimately up to governments to make the decisions.

Following their speeches, the Bundesbank President and the Governor of France’s central bank issued a joint statement in which they stressed the need to revive and foster Franco-German dialogue. Occasions when Germany and France have worked together in the past have demonstrated that crises, such as the sovereign debt crisis and the coronavirus crisis, can be successfully overcome through joint efforts.

Europe is at a crossroads: it can either continue on its path of low growth, low productivity and low innovation, or it can pool its strengths to achieve an ambitious and even disruptive roadmap. US economic policy presents an additional challenge, but Europe must consider its own strengths. Mr Nagel and Mr Villeroy de Galhau flagged up deepening the single market, creating a Savings and Investment Union and cutting bureaucratic red tape to increase innovation as key steps going forward.

Europe needs to harness its economic size by removing internal obstacles. It needs to strengthen its financial muscle by improving intermediation to better marry up private savings with investment needs, for example when it comes to equity and venture capital. And it needs to pick up the pace on innovation, with less bureaucracy and a culture in which innovative entrepreneurs can bring their ideas to fruition.

Collaboration on defence and policy coordination

Russia’s war of aggression against Ukraine has demonstrated that economic integration alone is no guarantor of peace. Close coordination between France and Germany, including in areas such as foreign, security and energy policy, is therefore crucial. With this in mind, a more European approach to defence policies, including joint procurement of armaments, is needed, the two central bank heads urged. Both countries should continue their long-standing tradition of cooperation and work together to make Europe a major player on the international stage.

Joachim Nagel and François Villeroy de Galhau were speakers at this year’s European Banking Congress, an established meeting place for high-level representatives from the fields of politics, business, finance and academia. The EBC is intended as a forum for open and forward-looking discussion of European issues and their role in the world of politics and financial markets.