is much more compelling. to understand why, it is worth comparing the implications of inappropriate fiscal behaviour for the performance of an economy inside and outside emu. in a country that is not an emu member, a lax fiscal policy is punished primarily by financial markets, particularly by the foreign exchange market. excessive government borrowing leads to higher credit risk - premia and greater inflation uncertainty. higher interest rates are required by investors to hold the larger stock of government debt, and the exchange rate is likely to come under pressure. in a monetary union, the situation is somewhat different. by relaxing its fiscal policy, the government of a member state may hope to enjoy the short - term benefits of increased economic activity while the negative consequences are spread across the entire euro area. of course, given the “ no - bailout ” clause in the treaty, which stipulates that neither the community nor the other member states shall be liable for or assume the commitments of another member state, financial markets may also punish this country via higher credit risk spreads. however, financial markets tend to react very slowly and sometimes in a discontinuous way. in view of such incentives, the case for rules to protect against lax fiscal policies is much stronger in a monetary union than in a national setting. rules are needed to defend both a country ’ s own interest and the common interest in fiscal discipline, and to provide an early warning against the emergence of possibly greater and longer - lasting problems. * * * fiscal rules are essential for the proper functioning of a monetary union. but what form should these rules take? the current eu fiscal framework is based on a set of rules contained in the maastricht treaty and the stability and growth pact. the general government deficit should be kept below 3 % of gdp and budgetary positions should be maintained close to balance or in surplus over the medium term. by respecting the “ close - to - balance - or - in - surplus ” rule, a government can create sufficient room for the automatic stabilisers to operate and help cushion the effects of cyclical downturns without breaching the 3 % ceiling. unfortunately, as we all know, respect for these rules in recent times has been mixed at best. a number of countries failed to reach close - to - balance budgetary positions during the upturn in 1999 and 2000. as a result, they soon found themselves close to or in breach of the 3 % ceiling when the economic situation deteriorated. portugal breached the 3 % ceiling in 2001

##z : the fact that you keep repeating this gives me the impression that banks are not sticking to it. do we therefore need new and stricter rules for banks and the markets? trichet : we need better regulations for banks. we also have important financial institutions that are not banks, for example highly leveraged institutions such as hedge funds, and they can also potentially be problematic in some circumstances. in the financial sector in general, not only in banks, certain types of behaviour have developed which are a long way from the values of our democratic societies. we need to change the dominant values in the financial sector. greed, which is too often the dominant value, must be replaced by a sense of responsibility vis - a - vis the real economy. that is one of the lessons learned from the financial crisis and is something that the ecb is taking to international fora. faz : is it only a question of morals, or is it also a task for regulation? trichet : it is a question of values and also a question of rules. the financial stability board has developed principles for guiding recommendations, for instance. in any case, we cannot afford to save the financial system a second time at taxpayers ’ expense. the system must become much more resilient. faz : it is being claimed that the speculation on the markets is also responsible for the weakness of the euro. is that right? trichet : let us be clear, it is not the euro that is in danger, but the fiscal policies of some countries, which have to be – and are being – addressed, and, by way of consequence, the financial stability of the euro area, which has to be – and is being – consolidated. in any case, market developments are always a combination of the mood of investors and the influence of speculative investors, such as hedge funds. faz : in the ecb, there is talk of reducing the influence of rating agencies. why do you think that a credit assessment by the ecb would lead to better results? trichet : that must be discussed globally. the functioning of the credit assessment system is currently highly pro - cyclical. it is certainly not necessarily optimal that we only have three major rating agencies for the entire world. but we have still not concluded our analyses. faz : is there any chance of a stable financial system as long as the economy and the member states are so heavily dependent on credit? trichet : we must improve very significantly the functioning of the