While the proposals tabled by the European Commission go some way towards improving macroeconomic and fiscal surveillance in the euro area, they fall short of the quantum leap forward that is needed in order to guarantee the smooth functioning of EMU. The legislative acts implementing the reform of economic governance are now being discussed in the context of the “trialogue” discussions taking place between the European Parliament, the European Commission and the Hungarian Presidency of the EU Council. The purpose of these discussions is to produce a common set of proposals that accommodates the amendments requested by the various authorities involved in the legislative process. The ECB has called on these authorities to produce a strong and clear set of rules, including automaticity in the triggering of procedures and sanctions, in line with the ten key elements for the reform of economic governance published on its website. 1 III. (e)  Strengthening the financial sector  The financial crisis has also revealed a number of deficiencies and vulnerabilities in the regulatory and supervisory frameworks in our economies. The massive economic and financial impact of the crisis has clearly indicated that addressing such deficiencies through far-reaching reforms is essential in order to prevent similar crises in the future. There is a relatively broad consensus as regards the nature of the reforms required. Indeed, following the deterioration of the crisis in the wake of the collapse of Lehman Brothers, the  1  See Key Elements of the ECB Opinion on Economic (http://www.ecb.int/ecb/legal/pdf/key_elements_opinion_con_2011_13.pdf).

The deterioration was particularly significant in countries in which: (1) pre-crisis growth had been of an unsustainable and unbalanced nature – typically as a result of an over-reliance on the expansion of private credit and the contributions of housing-related sectors (notably construction and housing finance) – and (2) in which governments had failed to take advantage of favourable developments in the years of booming growth in order to consolidate their public finances. Over time, concerns about the size of government deficits and soaring debt-to-GDP ratios – combined with uncertainty about the ability of governments to design and implement consolidation plans in the context of reduced potential growth and massive implicit liabilities towards the financial sector – developed into uncertainty about the sustainability of government debt. Although the initial problems primarily concerned the Greek government debt market, contagion and spillover effects meant that the crisis quickly spread to the sovereign debt of other so-called “peripheral” countries and other market segments. In particular, financial markets turned their attention to the solvency of some “peripheral” economies that were perceived to have been hit particularly hard by the crisis because of long-standing structural and institutional weaknesses. The deterioration of public finances in some euro area member States has impacted negatively on investors’ confidence in government bonds issued by these countries, and thus led to further turbulences in the financial markets. This is also reflected in the sharp increase in the yields on the government bonds issued by those countries.