Hence, the country would likely turn the table on the ECB, and push for generous liquidity support or supervisory forbearance. From the ECB’s perspective, an effective financial union is a key complement to the single monetary policy. To the extent that it restores the flow of savings between euro area countries, it will support the normalisation of monetary policy transmission and allow us to exit our exceptional measures. But more fundamentally, without integrated capital markets and a well-functioning banking sector, there cannot be a single monetary policy – and this means we cannot fulfil our mandate. Fiscal union The second pillar, fiscal union, is necessary to ensure that fiscal policies are fully commensurate with the requirements of the common currency. The crisis provided prima facie evidence of the sizeable negative spillovers associated with fiscal crises within monetary union. Moreover, it showed the importance of sound fiscal policies for allowing governments to perform their essential functions: countries with weak budgets lose their ability to perform cyclical stabilisation during a crisis. Measures that guarantee solid fiscal policies are therefore a public good – both for individual Member States and for the whole euro area. For domestic citizens, they ensure that the automatic stabilisers will be able to play out in full during a downturn and smooth the  BIS central bankers’ speeches  7  economic cycle. For citizens elsewhere in the euro area, they provide protection against contagion emanating from budgetary decisions over which they have no democratic control.

The financial trilemma of Dirk Schoenmaker, 6 that states that financial integration, financial stability and national supervision are not compatible, was disregarded and the consequences were significant in terms of the enormous capital inflows channelled by the banks of core countries to banks in the periphery, significantly contribute to the subsequent macroeconomic imbalances. Initially no one thought about banking union. Lesson number two: the financial and economic shock of the crisis vastly outran the shock absorption capacity at the national level. Nothing was foreseen to deal with liquidity crises that could emerge from contagion and multiple equilibria generated by market perceptions. Only later the EFSF and the ESM were created to address crisis management. Lesson number three: the existing rules on the fiscal front were insufficient in pre-crisis times, and even more so in crisis times when crisis management was key. Initially, no one talked about fiscal union to introduce more discipline and help with shock absorption. Lesson number four: the development of macro and external imbalances was significantly driven by private sector indebtness, proving that the fiscal brake was not enough to guarantee macro stability and excessive heterogeneity among member states. This provided the rationale for the recent creation of a formal Macroeconomic Imbalances Procedure to monitor and promote timely policy measures to avoid the building up of macroeconomic instability in member states. The deep integration of financial markets led to very large imbalances within the euro area. This was in part because fiscal rules were implemented weakly, not applied rigorously and subsequently watered down.