to the economy ( in lending operations ), or over the price of the assets which the central bank purchases in exchange for money ( in outright transactions ). provided the real interest rate or the price at which monetary injection occurs is decided by the central bank in all independence, and with friedrich von hayek famously argued in favour of a “ denationalisation ” of fiat money ; see von hayek ( 1976 ), denationalisation of money : an analysis of the theory and practice of concurrent currencies, london. he claimed that, if only government obstacles could be removed, a free competitive market for privately issued currencies would provide the optimal quantity ( and a wide variety ) of monetary products, all of a superior quality with respect to what a public central bank could offer. under certain conditions, this may also include legal intervention by the government in the form of declaring a currency legal tender ; see moutot ( 2011 ), “ systemic risk and financial development in a monetary model ”, ecb working paper, no. 1352. bis central bankers ’ speeches an exclusive view to maintaining a stable price level, it is less important, at least within certain limits, whether the central bank lends against private or public collateral. does this imply that the distribution of central bank liquidity does not matter? the answer is yes, but only to the extent that it does not undermine the incentives for private and public agents to systematically violate their solvency conditions. 10 by contrast, if these conditions are violated, risks of fiscal and financial dominance could emerge. this calls for the central bank to pay close attention not only to the quantity of its liabilities, notably outside money, but also to the quality and composition of the assets that back money. institutional underpinnings of sound money depending on the institutional environment, the authorities with the right to issue money could also face a strong inducement for overproduction. suppose, for instance, that this right lies with a fiscal authority, as has been the case over long stretches of history. the fiscal authority could finance state expenditure by raising taxes ; but this would require the establishment of costly administrative structures. it could even finance spending via its printing press. in a fiat money regime, at the margin, the cost attached to this operation would be close to zero. the benefit, however, would be positive and equal to the value of the new public undertaking multiplied by the opportunity cost of financing the new public function with taxes. the pecu

of domestic policies, which is currently being implemented in those countries suffering the most significant stress. but, at the same time, the elimination of any perception of redenomination risks can only be fully accomplished if – in addition to the required domestic policy action – the central bank is fully and credibly committed to intervening in sovereign markets as far as is necessary to avoid the pricing of sovereign risk becoming self - fulfilling. in that regard, the recent announcement by the european central bank of its determination to conduct unlimited intervention in the sovereign secondary markets, provided effective conditionality is fulfilled, constitutes a significant step towards the normalisation of market conditions in the euro area. yet, the return to a smoothly operating monetary union cannot be completely achieved by simply relying on ad - hoc reactions by policy - makers. institutional arrangements must be reviewed in order to restore adequate incentives for domestic authorities to prevent the reemergence of destabilising imbalances and to ensure that any residual risks arising in specific jurisdictions that could affect the area as a whole would be addressed by integrated mechanisms operating at the euro area level. the recent changes introduced in the european union to strengthen the requirements and the mechanism for the surveillance of domestic fiscal policies and structural reforms, together with the creation of the efsf and the esm – which we now know will be soon be launched – are good examples of the required institutional reforms. bis central bankers ’ speeches at the same time, a specific source of risks for the smooth functioning of monetary union that needs to be addressed directly is the financial instability experienced in specific jurisdictions. as we have seen in the last few years, the deterioration of the perceived solvency of financial institutions located in specific countries within the monetary union can have spillover effects across the financial sector as a whole, can contribute to a disorderly functioning of wholesale markets and can put great stress on the public finances of the countries affected. consequently, the soundness of financial institutions is of systemic importance within the monetary union and should therefore be preserved through the appropriate integrated crisis prevention and resolution mechanism. against this background, a consensus has emerged of unprecedented strength on the need to take steps to create a banking union. the first step would be the adoption of a single supervisory mechanism. a regulatory proposal for such a mechanism has been released this week by the european commission. the proposal has three main features. first, the assignment to the ecb of supervisory responsibilities for all banks in the euro area, and possibly also for banks in countries outside the