At the same time, euro area governments need to further strengthen the macro-prudential framework at the national and the European level. As you know, the European Systemic Risk Board is developing tools to identify and address potential future sources of systemic risk in the EU. And the three new European supervisory authorities – for banking, for insurance and occupational pensions, and for securities and markets – are strengthening our focus on spillovers within the EU’s financial system. However, one important element in the framework for macro-prudential supervision in the euro area is still missing. We still have no clear mechanism in place to deal with the systemic risk emanating from large cross-border financial institutions. We should intensify ongoing work on the establishment of a mechanism for the resolution of bank failures at the European level. This brings me to the third challenge that euro area governments face: the elimination of remaining institutional deficits in the euro area governance framework. European governments have made considerable progress on this front. In particular, they have reinforced the Stability and Growth Pact, with more “automaticity” and less room for discretion in the application of the preventive and corrective arms. In addition, the European fiscal compact will ensure strong national budgetary frameworks in order to facilitate compliance with the government’s obligations under the Stability and Growth Pact. And EU Member States have introduced a surveillance mechanism that aims to prevent and correct macroeconomic imbalances within the EU. It is now essential that the new governance framework is implemented to the letter.

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.