debt crisis, despite the policies aimed at containing the spreading of instability. note, however, that there may be latent contagion risks that have not yet materialised. it is quite likely that if the various crisis management measures had not been taken, contagion would be much more severe than presently observed. looking back in history before i turn to the ongoing european policy responses to contagion i would like to look back and consider what one can learn from history. fiscal stability in successful monetary unions a first step is to consider the relationship between fiscal developments across countries in monetary unions when accompanied by political integration, although differences to the present european situation are still large. michael bordo and co - authors observe a common pattern in the experiences of the united states, canada, germany, argentina and brazil during the 19th and 20th centuries. 16 successful fiscal federalism seems to have been associated with “ explicit or implicit no - bail - out clauses, constitutional restrictions and through discipline exercised by financial markets for government debt ”. 17 in the cases of the us and canada, the adoption of fiscal federalism entailed a shift of state debt onto federal hands. for the us this was achieved in the aftermath of the revolutionary war through a plan developed and executed by alexander hamilton. hamilton ’ s plan transferred state debts accumulated during the revolutionary war to the federal budget. in addition, it also converted state debts into bonds and established a “ sinking fund ”, in which revenues were collected to finance bond purchases on the open market. in this way the us created an efficient way to smooth fiscal revenues over time and managed to tap into the bond market at reasonable rates. another interesting experience, albeit again different in terms of environment, is the italian unification in 1861, when the kingdom of sardinia integrated various previously independent michael bordo,, lars jonung and agnieszka markiewicz, “ a fiscal union for the euro : some lessons from history ”, nber working paper 17380, september 2011. bordo et al., op. cit., p. 26. bis central bankers ’ speeches states. one of the first decisions of the newly constituted finance ministry of the italian kingdom was to underwrite all the outstanding debt of the integrated states. the insight that may be gained from these historical examples is that a well functioning monetary union requires strong and innovative approaches to deal with regional fiscal problems. this includes appropriate incentives for keeping public deficits under control, also in a low - interest rate environment,

vitor constancio : contagion and the european debt crisis keynote lecture by mr vitor constancio, vice - president of the european central bank, at the bocconi university / intesa sanpaolo conference on “ bank competitiveness in the post - crisis world ”, milan, 10 october 2011. * * * i would like to thank philipp hartmann, carsten detken, benjamin sahel, gianni amisano, frank betz, tobias linzert, roberto de santis, bernd schwaab, and isabel vansteenkiste, for important contributions to the preparation of this keynote lecture. ladies and gentlemen, the financial and economic crisis that started in august 2007 is a clear case of the materialisation and propagation of systemic risk. the banking crisis reached a climax in september 2008 with the demise of lehman brothers and the subsequent support to the financial system. in spring 2010, it turned into a sovereign debt crisis. and we are now in a situation where widespread instabilities reach new heights. in my speech today, i would like to address the phenomenon which is at the very centre of what we are experiencing in the euro area, the phenomenon of contagion. contagion is one of the mechanisms by which financial instability becomes widespread that a crisis reaches systemic dimensions. the other two mechanisms that constitute sources of systemic risk are the unwinding of financial imbalances and the occurrence of severe macro shocks. 1 i will argue that contagion phenomena play a crucial role in exacerbating the sovereign debt problems in the euro area. as a consequence, crisis management by all competent authorities should focus on the policy measures that are able to contain and mitigate contagion. several of the ecb ’ s interventions have been motivated by the need to address contagion, which impairs our ability to maintain price stability in the euro area. by focusing on contagion today, i do not mean to say that other sources of systemic risk do not play any role in the instabilities we are currently experiencing. quite the contrary. an important role is also played by the unravelling of widespread financial imbalances, which contaminated fiscal balances. as i go along, i shall first look at contagion conceptually. i will discuss its meaning from a policy maker ’ s perspective against the background of the academic literature. i shall then dwell in some depth on the evidence of contagion phenomena and risks