george a provopoulos : from financial crisis to financial stability – a european odyssey speech by mr george a provopoulos, governor of the bank of greece, at the bank of poland biannual eu presidency lecture “ from financial crisis to financial stability : a european odyssey ”, warsaw, 12 february 2014. * * * i would like to thank president belka for inviting me to be here. the occasion of these lectures provides an opportunity to take stock of the progress made toward european monetary and economic integration and the work that lies ahead. my discussion of these issues will be structured as follows. i will begin by describing some important shortcomings in the original euro area institutional set - up. this will lead me to a discussion of the origins of the euro area crisis. next, i will describe the ecb ’ s reaction to the crisis, as well as the measures that have been, or are being taken, to address the euroarea ’ s shortcomings, focusing on economic governance and banking union. i will then take stock of where we stand today – both in the euro area as a whole and in peripheral countries. finally, i will comment on what remains to be done to make europe more dynamic and globally competitive. the euro area at its formation and the origins of the crisis when deciding on what architecture to give to the monetary union, policymakers settled on a “ bare - bones ” approach. the approach rested on an independent, price - stability - oriented central bank – the ecb – and fiscal discipline by the individual countries, fostered by the rules of the stability and growth pact and enforced by the markets. the maastricht treaty called on countries to pursue sound economic policies that would support the ecb in maintaining its price - stability goal. 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 welcomed as part of an equilibrating process under which the fast - growing periphery caught up to the core. this architecture proved inadequate for several reasons, setting the stage for the euro - area crisis. first, the fiscal rules were poorly designed and under - enforced. as a consequence, in the years leading up to the crisis, the ratio of sovereign debt to

real gdp growth in the last quarter. the state, for its part, updated the law on over indebted households, amended the code of civil procedure, enhanced the efficiency of the judicial system and developed a framework for a secondary market for bad loans and non - bank credit servicing firms. turning to the most recent developments, following the eurogroup of 20th march, the greek authorities and the institutions have intensified talks on outstanding issues to reach a staff level agreement as quickly as possible. in the fiscal front, the state budget recorded a surplus of 0. 2 % of gdp in the first two months of 2017, while available data for 2016 indicate that the surplus will reach 2. 0 % of gdp, outperforming the programme ’ s target by a large margin. it should also be noted that the european stability mechanism adopted a set of short - term debt relief measures for greece on 23. 1. 2017. these measures, which were endorsed by the eurogroup in december, are designed to reduce interest rate risk for greece and to ease the country ’ s repayment profile. looking forward, the bank of greece expects gdp to grow by around 2. 5 % in 2017, although a downward revision of the december 2016 forecasts is likely due to the negative carry - over effect of the sharp decline in output in q4 2016 ( attributed mainly to the decline in gross fixed capital formation and government consumption ). downside risks to the economic outlook exist related to delays in the conclusion of the second review of the programme, the impact of increased taxation on economic activity and reform implementation. downside risks connected with the international environment include increased uncertainty associated with forthcoming elections in several eu countries, the rise in protectionism worldwide and a slowdown in global trade and a possible resurgence of the refugee crisis. upside risks are related to the inclusion of greek sovereign debt in the ecb ’ s quantitative easing programme ( qe ) and an increase in tourist arrivals and travel receipts, as indicated in the bookings trend. regarding the banking sector outlook, the out - of - court mechanism will focus on standardizing procedures for small business professionals and small and medium enterprises to ensure a rapid, effective and transparent resolution of arrears. on the remaining steps, it is important that bank managers and employees acting in good faith in managing non - performing loans should be protected from criminal prosecution, while the platforms for electronic auctions and the out - ofcourt mechanism are expected to become operational soon. addressing the problem of non - performing