in this respect, history tells us that loose monetary and fiscal policies lead to entrenched inflation processes, which in the end had adverse consequences for economic growth and employment. if we were to learn a lesson from the 1970s and the 1980s, it would be that there are high economic costs to be paid in fighting inflation once it has become entrenched. i should recall that it was this realisation which led to the worldwide conviction that monetary and economic policies should be stability - oriented. if i look back at the early years of stage three of economic and monetary union ( emu ), i can say that i am satisfied with what has been achieved by the monetary policy of the ecb. inflation expectations over this very challenging period indicate that there is public confidence in the fact that price stability in the euro area will be maintained. this confidence constitutes a major achievement which - through a variety of channels - contributes to raising the growth potential of the euro area. however, i must also confess that other macroeconomic policies have not lived up to expectations. in the area of fiscal policy, we have seen a process where commitments made have repeatedly been broken. from the start of stage three, some countries have not shown sufficient determination to meet one of the key objectives of the stability and growth pact, namely to achieve budgets in balance or surplus over the medium term. as the times of strong economic growth have not been properly used to bring the fiscal position of these countries onto a sustainable basis, it is not surprising that these countries have had problems during the last few years in keeping fiscal deficits below the threshold of 3 % of gdp laid down in the treaty. in this light, i view recent fiscal developments and the discussions surrounding the stability and growth pact with great concern. there is growing evidence that most countries will miss their budgetary targets for 2003 by a significant margin. while the deterioration of budgetary balances mainly reflects thelower than anticipated economic growth, it is worrying that not all countries with severe imbalances have so far introduced sufficient consolidation measures. the lack of fiscal discipline - and notably the lack of any clear medium - term - oriented consolidation strategies - is a factor weighing adversely on the euro area's long - term growth prospects. in order to strengthen confidence in the euro area, it is fundamental to maintain the credibility of the institutional and economic underpinnings of emu and to abide in all respects by the agreed rules of the game. it is essential that, in the budget

are fully aligned with its european financial stability mandate. a second reason why banking union is essential to monetary union is that it supports the implementation of the single monetary policy. the even transmission of monetary policy across all member countries of the euro area requires a level of financial integration that dirk schoenmaker ( 2011 ) “ the financial trilemma ” in economic letters, 111, pp. 57 – 9. bis central bankers ’ speeches ensures well - functioning cross - border money markets. yet we have seen during the crisis that without a euro area - wide approach to financial governance, financial markets can end up re - nationalising. a strong banking union can help mitigate several sources of this fragmentation. a single supervisor should enhance transparency and thus increase trust in cross - border lending, while supervisory ring - fencing or national asset - liability matching would no longer be relevant given the ssm ’ s european focus. in addition, an effective single resolution mechanism would help attenuate the infamous bank - sovereign nexus. sovereigns would have less ability to intervene in failing banks, thus allowing bank risk to be better separated from sovereign risk. the third reason that justifies the banking union has to do with the effects of unsupervised cross - border lending on real economic developments. contrary to the “ it ’ s mostly fiscal ” view of the crisis, 2 financial sector developments largely explain the build - up of unsustainable current account and competitiveness positions in peripheral countries before the crisis. the current account deficits in most peripheral countries were in fact led by huge capital inflows implying capital account surpluses. the exposures of banks from core to peripheral countries more than quintupled between 1999 and 2008. competitiveness losses were simply the mechanism that connected the capital surplus and the current account deficit – that is, an appreciation of the real exchange rate caused by economic over - heating. as john williamson explained long ago it is impossible to have “ an immaculate transfer ” from capital inflows to current account deficits. 3 national supervisors found it impossible to contain these developments because they had to respect the single market rules and lacked the macro - prudential tools to offset the effects of large capital inflows. but by creating supervision at the level of market, banking union offers a possibility to better pre - empt such developments in the future – and therefore to better protect the real economy, growth and employment. the ssm and the practice of banking in europe let me now turn to the