This implies that our various policy instruments are deliberately chained together in such a way that the forward guidance applied to our asset purchase programme – which is time- and statedependent – extends also to our interest rate policy. So our forward guidance is de facto on the entire package, not on any specific component of it. And this guidance relates not just to the conditions under which we would withdraw stimulus – i.e. the sustained adjustment in the path of inflation – but also to the sequence of measures we would use to do so. The logical basis for this sequence stems from the same reason why we exploited the margin provided by conventional interest rate policy before resorting around the same time to negative interest rates and large-scale net asset purchases. In a multi-country monetary union such as the euro area made up of segmented national financial markets, asset purchases are inevitably more difficult to calibrate, more complex to implement, and more likely to produce side-effects than other instruments. So it is natural that we turned to them only after other, more conventional options were becoming exhausted. Similarly, lowering interest rates into negative territory in a largely bank-intermediated financial system was a step into uncharted waters. From today’s perspective, however, the negative rates, in conjunction with the other elements of our easing package, have turned out to be powerful in terms of easing financial conditions. And the potential negative side effects have so far been limited.

These two findings militate in favour of a more comprehensive policy framework for governing financial stability in Europe, which should comprise in my view the following. First, the full implementation of the economic governance reform, which is presently under discussion. It is unquestionable that a sound and credible framework of economic governance is fundamental for financial stability, as, for example, public debt developments have demonstrated. Second, a strengthening of financial supervision in the euro area. This should be understood as an essential component for the overall effectiveness economic governance alongside the strengthening of the fiscal pillar, the surveillance of macro-economic imbalances, co-ordination of economic policies, and the European Stability Mechanism. I will organise my remarks today as follows. I will begin by examining how the crisis unveiled the shortcomings of economic governance in what regards in particular the channels through which financial instability can propagate in the euro area. I will then propose what should be, in my view, the five key components of financial stability governance, highlighting in particular the necessary euro area dimension of such governance. Economic governance and financial stability The crisis provided some important lessons for economic governance in the euro area – lessons that were not fully understood at the inception of EMU. BIS central bankers’ speeches  1  The first lesson refers to the sources of financial instability in the euro area. Euro area economic governance had been constructed primarily to prevent negative spillovers via the public finance unbalances and we learned that this was not enough.