the case for those countries which have put off the necessary adjustments time and again. this is where the critics jump in to say that excessive saving damages economic growth. however, i think this is too short - sighted. of course fiscal consolidation normally dampens economic activity. but there is no way the present situation can be described as “ normal ”! in fact, doubts about the sustainability of government finances are probably themselves a considerable drag on growth. the critics are right about one thing, though : consolidation alone is not enough to solve the problems we are facing. secondly, the countries affected by the crisis therefore need to conduct structural reforms in order to become more competitive and to promote economic growth. such reforms are, naturally, difficult and painful. ireland has shown, however, that they are possible, and the german experience has proven that they pay off in the long run. and, thirdly, we need a stable architecture for our monetary union. instead of constantly patching up the results of fiscal policy mistakes and insufficient implementation of the stability and growth pact, the framework of monetary union has to be changed in a way such that sound fiscal policy is also truly guaranteed in future. in my view, there are two options open to the euro area : either we can return to the founding principles of monetary union agreed at maastricht, or we should venture the step towards a deeper european integration which also includes fiscal policy. 3. 1 returning to the founding principles of monetary union regarding the first option – returning to the founding principles of monetary union – i do not share the frequently voiced fear that the current framework is unsuited to monetary union. nevertheless, it does require considerable adjustment. there are three key points here. firstly, the stability and growth pact needs to be given “ teeth ”. in particular, stronger automatism is needed to penalize breaches of the deficit and debt limits. secondly, the no - bail - out principle needs to be reinforced : no member state should be permitted to assume liability for the debt of another member state. financial market investors will only punish bad fiscal policy behaviour promptly if they expect to lose their money. thirdly, the euro area needs a permanent crisis mechanism. recourse could be taken to this mechanism if a crisis erupts and financial stability throughout the euro area is at risk. however, there are three important aspects to note : assistance to individual countries must be tied to strict economic and fiscal policy conditionality, it must only be granted with appropriate

andreas dombret : financial stability – challenges from a european perspective luncheon speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the american council on germany in new york, new york, 13 april 2011. * 1. * * welcome address ladies and gentlemen leaving frankfurt heading south on the autobahn, on the right - hand side you suddenly come upon two old planes framing a rampant arch. neither of the two planes is a beauty. nevertheless, the monument is a major attraction. the aircrafts are a douglas c - 47 and a douglas c - 55, which were two of the airplanes deployed by the united states air force during the famous airlift of 1948 to 1949. the arch in the middle of the triptych symbolises that airlift. to this day, germany remembers that crucial moment in time. a living friendship needs the sound foundation of common values and it also needs institutions that cultivate an intellectual and cultural exchange. the american council on germany plays an important role in bringing together leaders from both our countries. i was therefore honored to receive an invitation from you, the american council on germany, to speak to you today. 2. introduction let me start by stating four propositions. with reference to the title of my speech, these propositions should constitute a current european perspective on financial stability. it goes without saying that they are far from being exclusively european. my first proposition is that we have been living with the crisis for four years now. it is too early to announce the advent of a post - crisis economy or a post - crisis financial system. my second proposition is that sovereign risk should be considered the main overarching risk to financial stability in germany and in europe as a whole. nevertheless, my third proposition is that the risk outlook for the german banking system has been improving. my fourth and final proposition is that financial stability constitutes a long - term strategy for forestalling the build - up of cyclical and structural excesses in financial markets. even when acute threats to financial stability may warrant extraordinary measures, policymakers have to keep in mind the longer - term costs of prolonged ad hoc measures if they distort incentives and undermine market discipline. 3. in the fourth year of the crisis let me expand on my first proposition. we have not left the crisis behind us, although the nature of the crisis has obviously changed over the past four years. the crisis that erupted in 2007 had its origins in a set of problems that