to me it is obvious that the process of european integration has reached a crossroads where the future form and degree of european cooperation are up for decision. the current debt crisis heralds a new era for the european economic and political architecture. the difficulties are hard to overcome but certainly also imply enormous potential. the strong interdependence of markets within the euro area facilitates financial contagion and spillovers. to safeguard the financial and macroeconomic stability of the euro area the problems of individual countries have to be tackled by common supranational political and economic initiatives. an important lesson to be learned from recent developments is that a currency union in the end also amounts to some form of political union. this understanding has led to a revision of the european economic governance framework. stricter rules and the more immediate threats of financial sanctions were formulated to prevent unsustainable public finances and macroeconomic imbalances in the future. while such rules have the ability to give guidance and to deliver benchmarks, it will never be possible to force countries to fully comply with them as long as the countries involved are sovereign nations. in the end, what it all boils down to is that a political union needs more than a tight set of rules and restrictions, namely central decisions - making in fiscal policy, or, at least a strong say for community institutions in recipient countries ’ budget policies. the developments over the past two or three years indicate that even in the face of a severe sovereign debt crisis with potentially devastating consequences for the euro area as a whole, the time is not ( yet? ) ripe for such a far - reaching change in governance and sovereignty. let me in this context also briefly touch on the often raised call for “ solidarity. ” in the context of the eu debt crisis, for most people the picture that comes to mind is “ rich ” european countries paying for transfers to the troubled “ poor ” countries. however, this is only one side of the coin. solidarity also implies the willingness of the recipients of transfers to take maximum effort to improve their own financial situation. whatever decisions governments make, it is vital that the majority of voters ultimately support these decisions. this applies both to recipient and to creditor countries. rescue packages or intergovernmental transfers that do not have public support certainly lead to unsustainable political developments, which in turn have the potential to trigger a new confidence crisis. the potential of the current crisis lies in the momentum for change. the crisis could be used to

an important contribution to reviving europe and making it flourish again. one challenge along the way is that of gaining a more comprehensive understanding of the financial cycle – which is the topic of our conference. the global financial crisis and subsequently the sovereign debt crisis have ( once again ) strongly highlighted the key role financial developments play for economic activity and, at the same time, the necessity to review our understanding of the finance - growth nexus. let me briefly spell out what i mean by that. prior to the crisis, most economists believed that financial deepening strengthens long - term growth as it improves the allocation of resources by facilitating the collection of information, the monitoring of projects, the trading, diversifying and managing of risks, the mobilization and pooling of capital and, finally, the exchange of goods and services within the economy. 1 consequently, most observers did not consider the strong growth of private sector credit and house prices in several euro area economies ( like e. g. spain or ireland ) prior to the global financial crisis to be overly problematic but were of the opinion that it was – at least largely – sustainable. in a similar vein, the credit boom in cesee ( which started around 2003 ) and the substantial increase in house prices in many cesee economies before the global financial crisis were conceived as part and parcel of the catching - up process these economies went through – at least during the first years of the boom. given the low starting levels of credit - to - gdp ratios and of house prices in the early phases of the transition process ( as compared with fundamentals ), there was general agreement that there was a need – and indeed room – for further financial deepening in cesee. aptly reflecting these considerations, the ceei 2005, for example, dealt with the topic of “ financial development, integration and stability. ” while most of the contributions at the time emphasized the considerable potential for further financial deepening in cesee, which would increase growth and foster economic convergence in the region, several discussants aired concerns that rapid credit growth and soaring house prices, if they continued unchecked, could breed instability further down the road. oenb research at the time suggested that credit - to - gdp levels had surpassed equilibrium values ( as given by fundamentals ) in some, but not in all, cesee countries by 2005 / 06 – while the credit boom went on until late 2007 in the baltic countries and until the fall of 2008 in most other cesee economies. however, the tendency