policies should be geared to preventing an excessive slowdown. for the united states, it is essential to avoid the risk of a sharp fiscal tightening, such as would be produced in 2013 by the legislated automatic spending cuts and the expiry of earlier tax reductions. in europe, the reform process must be reinforced at supranational and national level, in order to foster growth and correct both public and private structural imbalances. in particular, the reform of economic governance must be accelerated, in order to break the linkage between sovereign risk and bank risk. this will require courageous moves towards fiscal and financial union. amendments to national constitutions may be necessary to shift some elements of bis central bankers ’ speeches sovereignty to the supranational level. the common resources made available by any such form of union should be complemented by cogent rules and powers of control and intervention. for italy, the emergency is not over. structural reforms, if seen within a consistent and comprehensive strategic framework, can provide the basis for a surge in confidence in our potential for sustained economic growth. preserving and sustaining fiscal responsibility is essential, even if at the cost of some short - run difficulties. bis central bankers ’ speeches

to follow almost automatically from competitive pressures. but the fiscal rules were not fully enforced, macroeconomic imbalances mounted and markets behaved as expected : in spite of the no - bail - out clause, for years sovereign risks were underestimated ; then they were overestimated. the crisis also made clear the close linkage between sovereign risk and bank risk. before the crisis there was substantial convergence of interbank interest rates in the euro area and a significant reduction in the home bias of investors ’ portfolios. greater financial integration favoured uniform monetary policy transmission across the area. the crisis changed things dramatically. in the countries most severely affected by the sovereign debt crisis interbank rates increased to very high levels and wholesale bank funding became extremely difficult. italian banks ’ net fundraising from non - residents, on foreign interbank markets and by way of bond issues, shrank by more than €100 billion in the last five months of 2011. the huge volume of bank bonds maturing in 2012 and the difficulties that banks were encountering in accessing capital markets prompted fears that they might be forced to dump assets, triggering a potentially systemic negative spiral between declining asset prices, tighter lending standards and deteriorating economic conditions, which would jeopardize financial and price stability. indeed, in the final part of 2011 the eurosystem bank lending survey signalled a sizeable tightening of lending conditions. there was the concrete risk of a ruinous credit crunch. 6. policymakers responded in three ways : reform of european economic governance ; ambitious programmes of fiscal consolidation and structural reform in member countries ; and decisive actions by the eurosystem to stabilize financial markets and preserve the monetary policy transmission mechanism. 7. first, the reform of the treaties and of the stability and growth pact reflects recognition of the shortcomings of european governance. the first step was the creation of financial support mechanisms ( the european financial stability facility and the european stability mechanism ), which permit the mobilization of substantial resources. the so - called “ six - pack ” and the “ fiscal compact ” reinforced the fiscal rules and strengthened enforcement mechanisms. multilateral surveillance was extended to macroeconomic imbalances. the effort, though significant, is not complete. the fiscal compact awaits national ratifications. proposals to further strengthen multilateral surveillance are still being discussed by the eu commission, the council and the parliament. financial assistance to states in difficulty must be made operationally effective. it must be possible to intervene promptly in the securities markets and directly in favour of banks, with