worrying levels, accompanied by a growing skepticism toward many forms of transnational cooperation, not least in the united states. one of the drivers of rising skepticism has certainly been the euro area crisis – which has been a crisis of confidence – and its negative economic impact. meanwhile, the euro area economy is in much better shape. last year, euro area gdp grew at 1. 7 percent – faster than potential gdp. this has also had a positive effect on employment. unemployment in the euro area is still higher than before the crisis, but it ’ s at its lowest level since 2009. the average unemployment rate currently stands at 9. 5 percent. but this evidently does not provide the full story when it comes to the state of the euro area. the challenges are complex. as h. l. mencken, an american journalist with german roots, once said, “ to every complex problem there is an answer that is simple, clear and wrong ". in line with this, i 1 / 5 bis central bankers'speeches will take a closer look at two major issues of the euro area and the european project, namely 1. the quest for a suitable institutional framework, and 2. the question as to whether the cooperative framework underpinning the european project and international arrangements is outdated. 2. towards a suitable institutional design the institutional arrangements of the euro area remain its key challenge. the euro crisis, in particular, revealed severe structural flaws. let me briefly summarize the main lessons learned to give you a better understanding of the current reform challenges. the crisis demonstrated how much the euro area requires a framework that is able to absorb shocks and deal with heterogeneous issues across regions and member states. a key part of this challenge is that member states tend to be exposed to divergent regional developments while at the same time the single currency makes currency appreciation or depreciation no longer available as an economic policy tool. principally, member states may address their regional issues by employing independent fiscal and economic policies. in a currency union, the burden of excessive debt can be partially shifted to other member states. this increases the incentive for member states to avoid politically difficult decisions in the short term by borrowing more. it is important to remember that this problem had been foreseen from the very outset. the founding fathers of the european monetary union put rules in place to prevent negative spillovers. however, in practice, the rules have not always been followed, not least because of the shortterm incentives that i have already

to counter excessive risk - taking, the pursuit of short - term gain and opacity in compensation. they emphasize disclosure and the control function of the board of directors and the shareholders. above all, they extend regulatory jurisdiction to the sphere of executive compensation. a first check on their application is scheduled for march 2010. in march 2008 the bank of italy introduced principles and implementation guidelines on this matter that apply to all banks, thus in part anticipating international developments. yesterday additional criteria for application were notified to all intermediaries. the most important banking groups have been asked to adapt promptly to the latest standards issued by the fsb and to plan any corrective measures by the end of the year. we are now in a decisive phase. the determination shown by international cooperative efforts in conceiving and drafting new rules for the international financial system must be harmonized at international level and implemented rigorously at national level. protectionism – above all financial protectionism – is no way out of the crisis. 2. the italian banks the italian banking system has weathered the crisis better than many others, but we must not lower our guard because fragility still remains. italian banks ’ capital is above the minimum regulatory requirements. data for june show that the five largest groups had improved their capital positions compared with the end of 2008. their total capital ratio, the ratio of total capital to risk - weighted assets, rose by 0. 6 percentage points to 11 per cent ; their tier 1 ratio rose by 0. 7 points to 7. 4 per cent. their core tier 1 ratio – excluding hybrid capital instruments and considering only the highest quality components of capital – rose by 0. 8 points to 6. 6 per cent. their financial leverage remained low by international standards. the rigour the bank of italy has applied in its prudential supervision of banks ’ capital has protected them in this critical phase. a more general revision of the entire supervisory process has been under way for some time : stress tests are an instrument that we now use continuously ; specialist inspection teams are constantly present at the largest and most complex banking groups, to analyze specific questions and risk profiles. we must not overlook the dangers inherent in a still delicate economic situation. credit quality is deteriorating rapidly. in the second quarter of this year the seasonally adjusted ratio of new bad debts to total loans rose to just under 2 per cent, from 1. 6 per cent in the first quarter. the increase was especially large for loans to firms ( from 2. 1 to