andreas dombret : the present state of the euro - area sovereign debt crisis speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the bank of america merrill lynch global macro conference, london, 12 june 2012. * 1. * * introduction having joined the board of the bundesbank only two years ago after a long career in banking, i am, once again, delighted to address senior market participants. i am acutely aware of the importance to exchange information on the euro - area sovereign debt crisis not only among central bankers and policymakers but also with the markets. first of all, before commenting on the sovereign debt crisis, i would like to remind you of a success story. more than 330 million people in the euro area are benefiting today from a single currency, which was introduced in 1999. the euro is not only our most visible symbol of european integration. while the motivation for its introduction was predominantly political, the euro has been a success in economic terms, too. since its introduction, its internal value has been at least as stable as the earlier national currencies. the average inflation rate has stood at 2 %. i call this a true success. that is all well and good, you may say, but some of you may be wondering whether such a positive verdict has not been refuted by the most recent upheavals in the euro area. indeed, some investors are sceptical about the euro, and more than just a few are predicting the break - up of the currency union, or at least the departure of individual member states. in plain language, the central question in my remarks today is “ can the euro make it, and how? ” the answer to the first part of this question is crystal clear : “ yes, it can and it will. ” to answer the “ how ”, i shall proceed in two stages : first, by explaining how the crisis came about and, second, by describing europe ’ s response so far and, to our mind, future actions needed. 2. analysis of the crisis there is no doubt that the euro - area sovereign debt crisis, which was triggered by the global financial and economic crisis, has been the greatest challenge ever faced by european monetary union. the european monetary union is certainly at a crossroads. the more pressing question, though, is what european monetary union will look like over the medium to long term. will monetary policy, for example, be able to

the painful lesson that contagion, via the financial system, has proven to be the achilles heel of european monetary union. hence, improving the resilience of the financial system, even though it is a major policy goal across the world, is particularly important in the context of our monetary union. but let me now elaborate on the first and the second requirements of the euro area for overcoming the crisis – fiscal and structural reforms in the member states as well as a better framework for european monetary union. significant progress has already been made with regard to budget consolidation and, to a lesser extent, in terms of structural reforms. this is true of the programme countries which have to comply with the conditions of the respective adjustment programmes. and it is also true of italy and spain, the third and fourth - largest euro - area economies, which have seen a significant rise in their bond yields. their governments have embarked on labour market reforms and spending cuts. but there is no room for complacency. flagging eagerness or too little disclosure of looming risks will be penalised immediately. we have to bear in mind that market pressure – together with political pressure – has fostered reforms and hopefully keeps them on track. by the same token, however, investors should have some patience for reform measures to unfold. true, we are now in the third year of the sovereign debt crisis, and too often precious time has been wasted. but we should not forget that the adverse developments that led to the sovereign debt crisis emerged over a decade. clearly, they cannot be reversed in a matter of weeks. the road to recovery is long and uneven ; backlashes are to be expected. looking at spain, the country on which markets are focusing presently, i wish to acknowledge that the government has already taken bold steps to address structural weaknesses, for example by overhauling some of the rigid labour rules. yet it has become clear that the spanish banking system needs more capital. therefore, i appreciate the intention of the spanish government to seek financial assistance from euro area member states. the financial assistance will be provided by the efsf / esm for the recapitalisation of spanish financial institutions. funds would not be provided directly to the banks but, in line with current efsf / esm rules, be channelled through the spanish state, in this case the restructuring fund frob. i am optimistic that this package will effectively mitigate the negative feedback loops between the banks ’ deleveraging and the real economy