All in all, a consistent framework of regulations, laws, judicial enforcement and resolution is essential for deep and resilient financial integration. Completing the banking union and the capital markets union is therefore a necessary condition for the expansion of private risk-sharing in the euro area. Yet it is not a sufficient condition. And this brings me to the second area where public sector policies can complement private risk-sharing: by increasing economic convergence and thereby building trust among cross-border investors. 4. Increasing economic convergence The crisis showed clearly the potential of some euro area economies to become trapped in bad equilibria. And plainly, as long as this risk exists, it will act as a deterrent to cross-border integration, especially for retail banks that cannot “cut and run” as soon as a recession hits.28 Put simply, we will not be able to foster private risk-sharing in our union if crises can call its very integrity into question. So, if we are to deepen private risk-sharing, the tail risk of bad equilibria needs to be removed, and replaced by policies that lead to sustainable convergence. This requires action at both the national and euro area levels. In the eyes of many observers, three features made countries vulnerable to downward spirals: weak banks, lack of fiscal space and low growth. Stabilising the financial sector in the ways I have just described would address one part of the problem. But the common factor uniting all three was growth. Very low growth rates reduced fiscal space and harmed bank balance sheets.

In 2012, spreads vis-à-vis German ten-year government bonds reached 500 basis points in Italy and 600 basis points in Spain, with even wider spreads in Greece, Portugal and Ireland. The fifth stage of the crisis then followed: the breakdown in monetary policy transmission across the euro area. Interest rates faced by firms and households in vulnerable countries became 2/9  BIS central bankers' speeches  increasingly divorced from short-term central bank rates. As those economies represented a third of euro area GDP, this posed a profound threat to price stability. The ECB responded with its announcement of Outright Monetary Transactions (OMTs), which restored confidence in sovereign bond markets, helped to repair the monetary policy transmission mechanism, and broke the downward spiral. With less of a direct market impact, but fundamental in confirming to the world the strength of our leaders’ commitment to the euro, was the earlier decision to create the banking union and the European Stability Mechanism (ESM). The long trip back to growth had begun. The unfolding of the euro area crisis yielded lessons for the financial sector, for individual countries and for the union as a whole. But the unifying theme was the inability of each of these actors to effectively absorb shocks. In some cases, because of their weaknesses, they even amplified those shocks. Indeed, banks fuelled the build-up of imbalances and then exacerbated the resulting crash. Countries had too low growth potential, limited flexibility to bounce back from the crisis and too little fiscal space to stabilise their economies.