##d in full. they are, one might say, the logical consequence of the euro, deriving from the same functional logic that i referred to earlier. my colleague, otmar issing, will elaborate on this later. trying to talk about the possible political implications of the euro, i am entering uncharted territory. as niels bohr famously once said, " prediction is very difficult, especially about the future ". but there are fundamental questions about the future of europe to be answered, and the subsequent discussion will hopefully provide interesting insights : can monetary union function properly without some form of political union? is a " currency without a state " a viable construct? indeed, the question of whether a single currency requires – or inevitably leads to – a single state is hotly debated, not only among us, but also and especially in the three eu member states where citizens and policy - makers have yet to make up their minds about adopting the euro. i think that one of the reasons for this confused state of affairs is that " political union " is a rather abstract concept. it can mean different things to different people. on the one hand, " political union " can be broadly understood as a dense network of integrated policies, common rules and established procedures, as a union with strong and active supranational institutions, with common symbols and a common identity. measured against this yardstick, the eu already exhibits many of these features. if, on the other hand, we understand " political union " as the establishment of an entity that resembles the traditional nation state, the european union may still have some way to go, if indeed this is the direction we want to take. today's union is not a european federation, for example, or a united states of europe, with a constitution and a single executive, playing an active role in international affairs. will the euro lead us straight to a european constitution? the euro marks the achievement of full integration in the monetary field. in purely functional terms, it is therefore an endpoint, rather than an intermediate step. however, with the euro, we now form a " schicksalsgemeinschaft ". our economies are tied together, and so our policy decisions become a matter of concern for all. we have a legitimate interest in developments and political actions in other euro area countries, since we are affected by them – for better or worse. if i may use a " domestic " metaphor, the marriage in which the euro has

divergence happen? let me explain this in detail because it is so important for understanding our policies. a fundamental concept in central banking is what is known as “ monetary policy transmission ”. this is the way that changes in a central bank ’ s main interest rate are passed via the financial system to the real economy. in a well - functioning financial system, there is a stable relationship between changes to central bank rates and the cost of bank loans to firms and households. this allows central banks to influence overall economic conditions and maintain price stability. bis central bankers ’ speeches but the euro area financial system has become increasingly disturbed. there has been a severe fragmentation in the single financial market. bank funding costs have diverged significantly across countries. the euro area interbank market has been effectively closed to a large number of banks and some countries ’ entire banking systems. interest rates on government bonds in some countries have risen steeply, hurting the funding costs of domestic banks and limiting their access to funding markets. this has been a key factor why banks have passed on interest rates very differently to firms and households across the euro area. interest rates do not have to be identical across the euro area, but it is unacceptable if major differences arise from broken capital markets or the perception of a euro area break - up. the fragmentation of the single financial market has led to a fragmentation of the single monetary policy. and in an economy like the euro area where about three quarters of firms ’ financing comes from banks, this has very severe consequences for the real economy, investment and employment. it meant that countries in economic difficulties could not benefit from our low interest rates and return to health. instead, they were experiencing a vicious circle. economic growth was falling. public finances were deteriorating. banks and governments were being forced to pay even higher interest rates. and credit and economic growth were falling further, leading to rising unemployment and reduced consumption and investment. a number of economies could have seen risks of deflation. all of this meant that the outlook for the euro area economy as a whole was increasingly fragile. there were potentially negative consequences for europe ’ s single market, as access to finance was increasingly influenced by location rather than creditworthiness and the quality of the project. the disruption of the monetary policy transmission is something deeply profound. it threatens the single monetary policy and the ecb ’ s ability to ensure price stability. this was why the ecb decided that action was essential. restoring the proper transmission of monetary policy so let me now turn directly to