It also requires that they “tie their hands” in a credible manner through stronger and more automatic economic governance. The monetary financing prohibition, in this way, is a spur towards better policies and better governance – in other words, a closer economic union. Similarly, the monetary financing prohibition changes the relationship between sovereigns and their national banking systems. As sovereigns cannot monetise debt, they can only backstop large banking sectors at a cost to their own creditworthiness. Insofar as this may undermine the balance sheets of the banks they are trying to save, it could end up triggering a self-defeating vicious circle. This implies that the only viable route to support the euro area’s integrated financial sector is through a more integrated system of supervision and resolution. The monetary financing prohibition, by constraining the resources of individual sovereigns, pushes the euro area in the direction of collective solutions. BIS central bankers’ speeches  7  Conclusion Let me now draw to a close. The key theme that has run through my remarks today is that, from every perspective, much closer economic and financial union is essential for the euro area. We have had this demonstrated in the clearest possible terms by the financial and sovereign debt crises. We have already taken important steps in this direction. Europe is ahead of others in addressing its imbalances. The challenge looking forward is to complete the process towards closer union and not settle for the “quick fix”. The people of Europe want closer cooperation in economic and financial matters.

Indeed, with a strong impulse from the G20 and the French Presidency, we have embarked into an ambitious financial reform agenda whose explicit objective is to prevent any recurrence of such intense episodes of financial turbulence and instability. On the other hand, growth cannot occur without efficient and developed financial systems to allocate savings, redistribute risks, and provide liquidity to the economy. There is ample evidence that financially repressed economies are penalized in terms of investment and economic growth. The challenge, therefore, is to find the right balance, as suggested by the title of our session. Looking at our achievements to date, my sense is that we are definitely moving in the right direction. But, of course, this is still work in progress: regulators and policymakers are constantly looking for additional evidence and insights on how to best reconcile stability and efficiency in the developments of our financial systems. The thrust of our efforts has been to increase the robustness of financial institutions and infrastructures. It is not in our power to eliminate financial shocks and volatility. It is our duty to make sure that they can be absorbed without undue consequences for the institutions themselves and the whole economy. Building up appropriate cushions was therefore a priority and a necessity to protect tax payers from the consequences of future turbulences. First and foremost, a robust system needs strongly capitalized banks. Basel 3 will make essential contributions in this regard, by increasing both the quantity and quality of banks’ capital.