, although credible sanctions for breaking those rules are hard to develop. 26 there is an obvious tension between using robust fiscal rules to solve this problem, and allowing national fiscal policy to act as a shock absorber. this reinforces the need for fiscal risk sharing between nations. as the presidents of the european council, european commission, eurogroup and european central bank argued in their report, european monetary union, which has so far relied on fiscal rules, will not be complete until it builds mechanisms to share fiscal sovereignty. 27 possible kenen ( 1969 ). this refers to a fall in output relative to potential output. see chamberlin et al ( 2013 ). these estimates are reported in melitz and zumer ( 2002 ). the delors committee ( 1989 ) report, which provided the foundation for monetary union in europe, recognised that market discipline would not be sufficient to ensure that participating countries followed sound fiscal policies, and that fiscal constraints would therefore be required. beetsma and uhlig ( 1999 ) provide a formal motivation for the resulting stability and growth pact as a device to internalise the costs of inflation that might otherwise result from imprudent fiscal policies. see also chari and kehoe ( 2007 ). recent experience demonstrates that overindebtedness can also have costly spillovers through financial crises. see barroso et al ( 2012 ). bis central bankers ’ speeches options range from a transfer union to a pooled employment insurance mechanism. whatever is ultimately chosen, the degree of fiscal risk sharing will likely have to be significant. similarly, in a monetary union between an independent scotland and the rest of the uk the two parliaments would have to agree on whether fiscal rules were sufficient or whether similar risksharing mechanisms were necessary. conclusion the scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union. all aspects of any such arrangement would be a matter for the scottish and uk parliaments. if such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place. those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. the euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pool

recession. it became clear that the lack of regulation did not really support lending over the longer term. in fact, banks were forced to start rebuilding capital in the middle of a slump, which amplified the credit crunch facing the economy and prolonged the recovery from the crisis. europe learnt the lesson. it undertook a swathe of regulatory reforms targeted at banks and nonbanks alike. since 2011, european banks have nearly doubled their core capital ratios to over 14 %. 1 we also saw the creation of european banking supervision to give us a broad european view of risks to financial stability. this meant that, when the pandemic hit, the financial sector could play a fundamentally different role. instead of being a source of instability, banks could be mobilised to enhance our response to the pandemic, rapidly funnelling liquidity to the economy. from march to may last year, bank lending to companies in the euro area rose by almost €250 billion, the largest jump on record in a 1 / 4 bis central bankers'speeches three - month period. the increase in bank capital before the crisis meant that supervisors could free up €120 billion of additional capital for new lending. and thanks to european banking supervision this decision was taken quickly and collectively, rather than in a drawn - out negotiation between multiple national supervisors. this joint european action also averted the risk of stigma that we had previously feared. what the financial crisis taught us, essentially, is that there is no trade - off between effective regulation and supporting growth. a robust financial sector is an asset during a crisis. and our experience during the pandemic has proven the wisdom of this lesson beyond doubt. the importance of credible commitment but the financial crisis also had a more profound impact on europe, morphing into the euro area sovereign debt crisis. i had a unique perspective on this event, witnessing its start when i was a finance minister and seeing it continue to unfold during my time as imf managing director. this crisis produced the second lesson i would like to highlight, which was possibly easier to see when one was looking from the outside. it was clear early on that our monetary union was lacking a full set of institutions and needed to be strengthened. we became painfully aware that the euro area was particularly vulnerable to self - fulfilling panics. what became evident is that the perceived commitment of policymakers was a crucial variable in effective policymaking. initially, we perhaps underestimated how important those perceptions are. it took time to realise