make it easier to evaluate risk characteristics and, therefore, investment opportunities across countries. in other words, the elimination of exchange - rate risk would lead to greater transparency and increased market discipline on governments. the dominant view at the founding of the emu was that current - account imbalances among countries in the monetary union would become as irrelevant as they are among regions of individual countries. persistent current - account deficits were interpreted as capital flows from countries offering relatively - low returns on investments to countries offering relatively - high returns. in other words, they were part of an equilibrating process under which the fastgrowing periphery caught up to the core. this architecture proved inadequate for several reasons. first, the fiscal rules were poorly designed and under - enforced. second, instead of increasing the pressure for structural reforms and policy adjustments needed to strengthen competitiveness in the periphery, market forces acted in the opposite direction. the markets mis - priced credit risk, underpinning large capital flows into the periphery and reducing interest rate spreads. the reduction in spreads led to a relaxation of the budget constraints that the peripheral countries bis central bankers ’ speeches faced and made it difficult to distinguish between those countries that were performing well in terms of policy adjustment and those that were performing poorly. to make matters worse, the current - account deficits in the periphery were financed through sources of volatile capital, such as debt securities and bank loans, rendering the periphery vulnerable to sudden reversals of capital flows. third, the founders of emu underestimated the importance of financial stability in a monetary union. thus, whereas they focused on the prevention of fiscal imbalances and inflation, they made no provision to deal with private credit booms and busts or with the feedback loops between banking crises and fiscal crises. under the original architecture, national authorities were solely responsible for banking supervision, resolution, deposit insurance, and financial stability. the combination of a lack of adequate fiscal rules, the absence of market - enforced discipline, the lack of attention to the interconnections between the banks and the sovereign, and increases in public and private indebtedness financed by volatile capital inflows was toxic. a tale of two crises broadly speaking, the euro - area crisis has consisted of two separate crises – a sovereigninduced crisis and a banking - induced crisis, as i will explain. a sovereign debt - crisis mainly occurred in greece. what the crisis countries – cyprus, greece, ireland, portugal and spain – have had in

. here, again, the case of greece illustrates the situation in the euro - area more broadly. the economic and financial environment in greece remains fragile and sensitive to negative developments. the bis central bankers ’ speeches very high unemployment rate and the large sacrifices undergone by the greek people led to social and political polarization. political uncertainty, and the risks associated with that uncertainty, could escalate ahead of the european parliamentary and local greek elections that will take place in may, undermining the recovery. it is my hope that such an unfortunate scenario will not occur. greek citizens, like the citizens in the other crisis countries, have had to undergo tremendous sacrifices during the past few years. these sacrifices are now bearing fruit and it would be tragic to see them washed away. despite these risks, i am confident that grecovery is on the way. the financial storm served an important purpose. it set in motion policy reforms at both the individual - country level and the euro - area level that will help foster a stronger and more secure europe, improving the welfare of its citizens and enhancing its position as a major player on the world stage. bis central bankers ’ speeches