##sbursement. in germany, for example, savings banks and cooperative banks have their own schemes in place which are designed to prevent institutions from becoming insolvent in the first place. so even the design of a potential european deposit insurance scheme would be a demanding task. my point is, then, that we haven ’ t got that far yet. let me now, as promised, explain why concrete considerations on the third pillar have to wait until other and more eminent issues have been resolved. essentially, the argument is about looking beyond ideas that may seem promising in a narrow sense – like edis – and acknowledging that the entire architecture first has to be made ready for this change. one has to realise that the actual impact of a reform hinges on the entire system evolving. in other words : we have to take a system - wide view. for the financial system, we have invested a great deal of time and effort in ensuring that market forces work not just in normal times but also in times of downturn and distress. this environment is conducive not only because of its disciplining effects on both debtors and creditors, giving them a clear and credible framework within which to act. it is also a key ingredient of the overarching architecture : because in a market environment, if individual action is not matched by individual liability, the rules can hardly be deemed sustainable. these considerations need to be taken into account in connection with a european deposit insurance scheme. a new insurance can only be in line with market mechanisms if there is a level playing field from the very beginning. specifically, this means that before entering a phase of mutual insurance or risk sharing, we must ensure that the risks that are already known – let ’ s think of them as legacy risks – are sufficiently contained. otherwise, moral hazard risks are likely to emerge. what are those risks where banks in the euro area are concerned? certainly, as we know today, the piles of non - performing loans need to be reduced significantly. another risk to be levelled concerns the build - up of bail - in - able capital : the resolvability of banks will be heightened once institutions have met their individual target levels. furthermore, national insolvency laws diverge to an extent that has a significant impact on risks to the national banking sector. these risks need to be addressed as well. finally, i would like to spend some time on another major threat that stems from a continuing sovereign - bank nexus – a situation that involves

being more the result of monetary policy mistakes, such as those associated with the great depression, than of supply - side forces such as were so plainly evident half a century earlier. inflation did not really become re - established on a significant scale until the second world war, after which it persisted for most of the remainder of the twentieth century. most recently, the potential problems posed by deflation, particularly in a financially developed world where debt and balance sheets interact, have become apparent, most notably perhaps in japan. all in all, there is perhaps a mixed message from these historical examples. it may be possible to live comfortably with a modest pace of deflation, especially if it reflects benign supply - side influences. nevertheless, monetary policy might usefully be engaged to avert it. c. globalisation and the pervasiveness of the law of one price returning to the factors behind current price trends, there is one aspect of globalisation which may be especially relevant. this is the rapid expansion of the range of globally traded output ( in contrast to efficiency gains within some pre - defined range ), with resultant implications for prices. in the past it was common to observe more rapid domestic inflation in economies enjoying faster productivity growth, as wages rose and the prices of non - tradables accelerated, dragging up the consumer price index. this mechanism, based on an assumed clear analytic distinction between price behaviour of tradables and non - tradables, may still be at work, but surely it is not as powerful as it used to be. the range of tradables is expanding relative to that of non - tradables. while it has long been acknowledged that progressively more goods are becoming tradable because of, for example, advances in freight transportation, the revolution in respect of services may now be more significant. thus, many services which were in the past produced only in the country where they were consumed can nowadays be outsourced offshore or accessed from somewhere else in the world at the click of a mouse - back - office processing, multi - functional call - centre services, legal advice, logistics management, design services for everything from clothes to buildings, and even certain forms of medical consultation or education, to name but a few. moreover, buyers of services increasingly elect to travel elsewhere to consume them. thus the international price elasticity of a wedding ceremony, a game of golf, hospital or health spa treatment, or conference facilities is ever rising. soon there will remain only very few location -