##ly obvious – previously, the financial markets appeared to assume that, should individual euro - area countries experience financial difficulties, the european community would bail them out, even though the eu treaty prohibits mutual liability. as a result, doubts as to the soundness of individual governments led to doubts regarding the euro area as a whole. it is therefore extremely important that, in the future, it is possible for over - indebted states to default. for one thing, this would significantly limit the extent of future crises ; for another, it would reduce the likelihood of the european community of states having to intervene. until then, however, we still need to overcome a few obstacles. one major obstacle is the strong nexus between banks and sovereigns. it means that insolvent banks can pose a threat to the solvency of entire governments, and vice versa. banks are not required to back bonds issued by european governments or other oecd countries with capital, and can hold unlimited quantities of them on their books. in theory, a bank ’ s business could therefore consist entirely of bonds issued by a single state. this rule creates a troubling risk concentration. to sever this unhealthy link, we need to make just one simple change. in future, banks must back the government bonds they purchase with sufficient capital. in short, the existing rules need to be improved to ensure that both creditors and borrowers consider the risks more carefully when lending or borrowing. however, this reform won ’ t be enough on its own to resolve the euro area ’ s underlying problems. another starting point for reform would therefore be to intensify the coordination and integration of economic policy within the euro area. without an integrated economic policy, it is difficult for the economies in a currency union to converge. implementing deficit ceilings for government debt is another area in which progress needs to be 2 / 4 bis central bankers'speeches made. all member states should adhere to these ceilings – in no way should they be seen merely as recommendations. the onus here is clearly on politicians. central banks can apply pressure, at most. 4. where is europe heading? now, there will be some who say that these reform proposals sound too ambitious given the current state of europe. but there are signs that the eu is indeed both willing and able to reform and that, overall, it is making progress. i would therefore like to bring three points to your attention. first, it goes without saying that you can think long and hard

they see stricter trade and immigration controls as the answer to people ’ s concerns. however, they fail to recognise that it is precisely the opening - up of trade that improves a country ’ s competitiveness by facilitating the division of labour, which enables countries to exploit their own individual competitive advantages. this allows goods to be produced at low cost, which increases consumers ’ purchasing power. ideally, this stimulates demand ; prosperity, investment, and, ultimately, employment increase as a result. one thing is clear : isolationism brings no benefits, offers no stability and does not lead to prosperity. the belief that protectionism is the better alternative is merely an illusion. 1 / 4 bis central bankers'speeches nonetheless, scepticism regarding the european project has grown. of course, some of the criticism aimed at the euro area is justified. unfortunately, closer european cooperation also produces undesirable side - effects. without a doubt, there are major benefits to the single european market. but, at the same time, it obviously creates redistribution effects which can cause the regional loss of jobs or wage stagnation. and these effects tend to undermine many people ’ s trust in the european union. the european project must therefore be judged on the extent to which it benefits all its citizens. on the one hand, economic and socio - political action needs to be taken in this regard – but i won ’ t go into further detail about that today. on the other, however, there is also a fundamental need to overhaul the regulatory framework in europe. parts of this framework need to be adjusted and parts need to be completed in order to provide a stable footing for the european project in the long term. only stable institutions and a reliable regulatory framework can create confidence. we saw the opposite of this during the european sovereign debt crisis, when a lack of confidence in the euro area led to a crisis which was by no means confined to individual countries. even though many necessary reforms have been initiated and the euro area has been made significantly less vulnerable to crises, we have not yet reached our goal. we still need to press ahead with the right reforms in order to strengthen people ’ s trust in the institutions of the eu, which would also take some of the wind out of the sails of populism. so let ’ s now consider where we could start making specific institutional changes. 3. the euro area – room for improvement in the status quo the sovereign debt crisis made one of the euro area ’ s problems glaring