of government balance sheets to borrow from future generations becomes more costly. at this point a gap opens up between the economic status that countries are accustomed to and the status that is affordable given the sustainable growth trajectory. in the crisis, this gap grew wider and became harder to close by the re - basing of economic activity. but the gap predated the crisis. warnings on the long - run sustainability of public finances, arising from unfunded social promises in a context of ageing populations, were legion long before the crisis erupted. and these warning were indeed addressed to most industrialised countries around the globe. nonetheless, in the five years prior to the current crisis, which were marked by very favourable cyclical conditions, government spending still outpaced gdp growth in most industrialised countries. in fact, this trend was more pronounced in the us and japan – where the average growth rate in government spending exceeded the average nominal gdp growth rate by 1½ and 2 percentage points respectively – than in the euro area where this difference only amounted to around one quarter percentage point. this second dimension is a crisis of the social contract, a contract that was established in the post - war era and that was fair and affordable at that time. it was fair because it implied bis central bankers ’ speeches solidarity towards the generation that experienced the war. it was affordable because of favourable demographics and growth prospects that were supported by rapid technological progress and a replenishment of the lost social capital. to sustain the key elements of this social contract a profound shift in economic policies is necessary in order to rethink the contract and, at the same time, elevate the long - term rate of growth. the incomplete institutional architecture of emu engineering such shift in policies requires a sound and robust institutional environment with an ability to produce political consensus – which brings me to the third dimension of the debt crisis in europe, namely the incomplete architecture of economic and monetary union. in this regard, the crisis has uncovered four shortcomings in particular : first, the eu fiscal rules were incapable of promoting prudent fiscal policies in good times ; second, there was no robust mechanism to prevent macroeconomic imbalances within the eu or to correct them ; third, insufficient coordination of macro and micro - prudential supervision of financial sectors allowed a build - up of vulnerabilities in banking sectors ; and finally, the absence of a crisis management framework frustrated efforts to contain contagion between countries and between the balance sheets of banks and

sovereigns, respectively. these shortcomings were a catalyst for the other two crisis dimensions : they facilitated excessive leverage throughout the economy which in turn sowed the seeds for the ongoing deleveraging crisis ; they did not address the spillovers stemming from interconnected financial systems in a single currency area, and they failed to impose tough budget constraints on governments, thus allowing them to postpone their efforts to address the crisis of the social contract, and leaving them without adequate fiscal space to cushion the crisis. in several european countries the current episode of fiscal austerity is sometimes attributed to the renewed focus of the institutional setting on budgetary discipline. but, in fact, the ongoing fiscal tightening is a necessary consequence of the misalignment of the social contract : already during the boom period preceding the crisis, public commitments in these countries were entered into at the cost of future generations ; the crisis then revealed that : first, projected expenditure was too high in view of plausible revenues ; and second, these projected revenues had to be revised downwards as the whole economy was rebased downwards. moreover, the problem is by no means specific to the euro area, as vividly documented by the intense political debates in other industrialised economies, such as the us, the uk or japan. the misleading attribution of fiscal austerity to european governance arrangements creates excessive political costs for the much needed strengthening of institutions, and should be rejected. however, even if such attribution is misleading, it demonstrates that the three dimensions of the crisis interact in a way that creates a “ political trap ” in which political consensus is hampered by a wrong diagnosis of the crisis, thus delaying the necessary policy shifts. the “ political trap ” is compounded by the strong inter - governmental dimension of european governance : elected leaders are locally mandated through local political processes, that fail to internalise positive cross - country externalities arising from policy changes. for political leaders this should imply that they have to step up their efforts in clearly communicating the current economic problems and feasible options. at national level, they must ensure that the body politic coalesces around policies aiming at restoring the credit of the state, as this is the only way to preserve our social model. and they must accept that european interest will be better promoted by strong community institutions. crisis resolution against this background, addressing the three dimensions of the crisis at once may appear as a daunting task. but precisely because the dimensions are so closely intertwined, successful reforms in