Real estate bubbles in some countries, widening current account deficits and generalised losses in competitiveness. The minimalist institutional construction of the euro area lacked the tools to discourage these developments. When these bubbles burst, the shock-absorption capacity of EMU was lower than anticipated. Indeed, financial integration acted as a shock-amplifier. Cross-border capital flows rapidly reversed and created contagion. This was in part because private agents realised that there were no mechanisms to ensure the continued solvency of banks and governments in situations of financial distress. Financial assistance at the European level, such that it existed, was reserved only for non-euro area countries. Moreover, there were no federal institutions – like the FDIC in the U.S. – to remove the burden of repairing the financial system from individual Member States. The official bodies that could – and perhaps should – have intervened to prevent these developments were national supervisors. Yet they lacked the perspective to do so and also the instruments to contain private capital flows that were considered to result from optimizing self-equilibrating markets. Only macro-prudential measures made possible by a consensus at the European level could have dealt with the situation. In other words, there was a mismatch between the degree of integration and the scope of governance. In retrospect, the euro area was not prepared to deal with the build-up of systemic risks. This was in a large part because it had not equipped itself with the institutions commensurate with a highly financially integrated monetary union.

Hence, the country would likely turn the table on the ECB, and push for generous liquidity support or supervisory forbearance. From the ECB’s perspective, an effective financial union is a key complement to the single monetary policy. To the extent that it restores the flow of savings between euro area countries, it will support the normalisation of monetary policy transmission and allow us to exit our exceptional measures. But more fundamentally, without integrated capital markets and a well-functioning banking sector, there cannot be a single monetary policy – and this means we cannot fulfil our mandate. Fiscal union The second pillar, fiscal union, is necessary to ensure that fiscal policies are fully commensurate with the requirements of the common currency. The crisis provided prima facie evidence of the sizeable negative spillovers associated with fiscal crises within monetary union. Moreover, it showed the importance of sound fiscal policies for allowing governments to perform their essential functions: countries with weak budgets lose their ability to perform cyclical stabilisation during a crisis. Measures that guarantee solid fiscal policies are therefore a public good – both for individual Member States and for the whole euro area. For domestic citizens, they ensure that the automatic stabilisers will be able to play out in full during a downturn and smooth the  BIS central bankers’ speeches  7  economic cycle. For citizens elsewhere in the euro area, they provide protection against contagion emanating from budgetary decisions over which they have no democratic control.