stability reviews, and have covered, among other matters, the renationalisation of interbank markets, dispersion of bank funding costs and bank lending rates along national lines. equally well documented is the high correlation between the creditworthiness of banks, as well as their funding conditions, and the creditworthiness of their respective government. the ultimate protection of senior bank creditors, depositors in particular, comes from the fiscal backstop provided – or not – by the sovereign. it is therefore not surprising that the fragmentation of the banking system along national lines only became visible and damaging after the start of the sovereign debt crisis, even though the fault lines had existed beneath the surface. bis central bankers ’ speeches the fundamental reason why this matters is that the single currency is really single only if the banking system is also single. money, remember, is the liability of the banking system. base money, issued by the eurosystem, is undoubtedly single, but it represents only a fraction of broad money. the remainder is issued by commercial banks. if the credit of the banking system – including deposits – is fragmented along national lines, then so is money. more prosaically, if there is a national bias in the funding cost of banks, then monetary policy impulses cannot be transmitted uniformly across the euro area. so how can the singleness of the banking system be ensured? the first option would be to strengthen the creditworthiness of individual sovereigns so that differences between them became negligible. it would mean moving to the situation, not as it was, but as it should have been, and was perceived to be before the crisis. under this approach, national governments would remain responsible for backstopping their banking system, but this backstop would be robust across the euro area. this is appealing, but it has two shortcomings. first, current conditions are not favourable. most governments have excessive levels of public debt and will need several years to restore their creditworthiness to the point where all could be deemed equally robust. in the meantime, bank access to funding would remain fragmented along national lines. this would perpetuate divergences in the conditions of access to credit for firms and households, and jeopardise national adjustment efforts. the potential for negative feedback loops or “ multiple equilibriums ”, to use the economic jargon, is obvious. national economies would continue to diverge. the second shortcoming is that this approach assumes that market discipline is totally effective.

jean - claude trichet : emu after seven years - successes and challenges speech by mr jean - claude trichet, president of the european central bank, at the frankfurt chamber of industry and commerce, frankfurt am main, 5 may 2006. * * * ladies and gentlemen, es ist eine große freude fur mich, heute auf ihrer konferenz uber meine ansichten und erfahrungen zur europaischen wirtschafts - und wahrungsunion und zum euro sprechen zu durfen. selbstverstandlich ist mir bewusst, dass der deutsche industrie - und handelskammertag ( dihk ) immer ein starker befurworter der wahrungsunion und allgemein des europaischen integrationsprozesses war. lassen sie mich den weiteren vortrag nun in englisch halten. [ it is a great pleasure for me to speak today at this conference about my views on and experience of economic and monetary union in europe and the euro. i am fully aware that the deutscher industrie und handelskammertag ( dihk ) has always been a strong supporter of the emu and, more generally, of the european unification process. before continuing, please let me switch into english. ] in the first part of my talk today i shall elaborate on the reasons why i think that the single currency and the single monetary policy introduced more than seven years ago have worked very well. nevertheless, past success is not an excuse to overlook the challenges that lie ahead of us all, policymakers and social partners. in the second part of my speech i shall thus try to make clear how, in my view, these future challenges imply an urgent need for action and reform going forward. and finally, i will discuss how such reforms support the ecb ’ s monetary policy and the adjustment mechanism in the euro area. but let me start with the first years of emu. a credible and transparent new monetary policy framework at the time of the introduction of the euro, a completely new monetary policy framework was introduced in europe, with the european central bank ( ecb ) conducting a single monetary policy for the entire euro area, consisting of eleven and soon twelve countries and more than 300 million citizens. the most remarkable aspect of this new endeavour is that since the very beginning the ecb and the euro managed