Even small deviations from the targets can quickly jeopardise the progress made and undermine confidence. To address imbalances, countries also need to take structural measures and deal with market rigidities. Suitable structural reforms can have a positive impact on growth and employment already in the relatively short term, and can thus also help to mitigate the negative effects of consolidation. Structural adjustment nevertheless remains difficult, but not impossible. This is proved by the experience in the Federal Republic of Germany over the past years. Losses in competitiveness after the reunification boom in the early 1990s were effectively addressed by means of moderate wage growth over extended periods of time. At the same time, the German experience shows how well-targeted structural reforms strengthen potential growth and boost employment. The labour and welfare reforms contributed significantly to positive economic developments in Germany over past years. In the remaining time, let me also briefly address the other two challenges faced by euro area governments, namely the instability of the financial markets and the remaining deficiencies in the European economic governance framework. Banks should continue to strengthen their balance sheets. The financial system has to return to fulfilling its primary task of providing credit to the real economy. But, as I have said before, euro area governments also have to do their part. Sound fiscal positions across the euro area will contribute significantly to strengthening confidence in a banking sector that relies heavily on government bonds as safe assets and for use as collateral.

A surveillance procedure was also put in place to verify that all the parties involved complied with the agreed fiscal targets. And in the case of non-compliance, a “corrective arm” was envisaged, starting with warnings and ultimately culminating in sanctions, in order to ensure that governments would quickly reduce any excessive deficit through progressive corrective steps. The fiscal rules were complemented by additional elements, such as the Broad Economic Policy Guidelines, which were introduced as a tool to ensure a convergence of economic policies and performance across Member States and to foster economic growth and employment, as well as to attain the ambitious goals set in the “Lisbon Agenda”. How has the European framework for economic governance been applied and how well has it served Europe? It is true that the euro area has fared reasonably well in macroeconomic terms. For instance, real GDP growth per capita in the euro area has not lagged behind that in the United States. Over the same period under review, more jobs were created in the euro area than in the United States. However, the European governance framework was unable to ensure fiscal soundness and macroeconomic stability in all euro area Member States. Some Member States had already accumulated large fiscal imbalances in good times. The fiscal policy framework suffered from weak implementation, in particular after the reform of the Stability and Growth Pact (SGP) in 2005. Other macroeconomic imbalances, particularly divergences in competitiveness, were also allowed to develop over a number of years prior to the crisis.