market economy. in a vibrant market economy, money does not rest and is used to serve the creativity and the effort of undertaking enterprises. ii. the financial crisis let me start my remarks by recalling the origins of the crisis as i see them. over past decades, our economies have greatly benefited from the effects of financial liberalisation and financial innovation. for example, the securitisation of assets has played a role in facilitating an efficient allocation of economic risks. it allowed the financial sector to offer credit for productive purposes, at more favourable conditions than was possible in the repressed credit systems of the past. francesco sansovino, venetia citta nobilissima et singolare, venice, 1581. cited in f. braudel, “ civilization and capitalism, 15th - 18th century : the wheels of commerce ” university of california press, 1992. more recently, however, managing genuine economic risk gradually ceased to be the main concern of international finance. instead, the creation and assumption of financial risk became the core activity of the financial industry. the decoupling of financial positions from the underlying flows of goods and services gradually created the conditions for a credit boom. the credit boom was reinforced by an asset price boom, which credit itself was partly sustaining. both the credit and the asset price expansion found formidable amplifiers in the microeconomics of the financial markets and in global imbalances. in the financial market, compensation schemes for bank loan managers weakened their incentive to conduct a prudent screening of loans. executive pay was a function of overall volumes, which encouraged turn - over and the origination of loans. at the same time, risks could be shed – or so it seemed – by selling off the loan to other investors in the secondary market. as for these investors, increasingly complicated financial structures made it difficult for them to assess the quality of the assets that they were acquiring. they had to trust the originators. more than in the past, the viability of the financial system came to depend critically on trust and confidence. on a global scale, a chronic shortage of savings in some industrialised economies had to be financed out of an excess of savings in other parts of the world. so, international intermediation provided a potent fuel to the expansion of finance. in august 2007 – suddenly but not unexpectedly – trust and confidence started evaporating. the circular interactions between asset price appreciation, biased incentives, excessive complexity and global imbalances went into reverse. market liquid

governance in the euro area. iii. economic governance in the euro area the euro is the only major currency not issued by a single sovereign state, but by a union of states. the treaties specify a clear division of responsibilities between european and national policy - makers within emu. on the one hand, monetary policy is inherently indivisible, and in the euro area it is thus conducted at the supranational level by the ecb. on the other hand, fiscal policies remain largely the competence of national governments. today ’ s reform of the governance framework has to take the current constitutional framework as a given. for the foreseeable future we have to empower the institutional arrangements that are already in place to the point at which they can really and durably inspire confidence. the economic governance framework has been incorrectly implemented and, more importantly, has proven to be insufficiently binding whilst lacking appropriate comprehensiveness. the requirements for a very significant reinforcement of the fiscal surveillance of the stability and growth pact and for the creation of a new surveillance of competitive indicators and macroeconomic policy have been discussed widely. as you know, the ecb takes the strong view that there is the need for more speed and automaticity in the sanctioning mechanism, particularly in the stability and growth pact, but also in the broader macroeconomic policy surveillance framework. the experience of the past months has vividly demonstrated the importance of a timely correction of internal and external imbalances. beyond faster and more automatic sanctions, the enforcement tools also need to be more effective. the macroeconomic surveillance framework, in particular, needs to provide clear incentives by imposing financial sanctions already at an early stage. this also means that there should be no room for discretion in the implementation of the surveillance framework. at the same time, requirements on fiscal and other macroeconomic policies should be more ambitious. to ensure that none of the euro area countries are left behind, they have to bring national policies in line with the membership to a currency union. the implementation of sound fiscal and macroeconomic policies is best ensured if these are solidly anchoring at national level. an effective way of achieving this is to implement strong national budgetary frameworks in the euro area member states. bis central bankers ’ speeches another important area of reform, at the global level, is the reform of financial governance. i have to say that on financial reform we have made more rapid progress. as you know, we have drawn up a set of more stringent banking regulations