the case for those countries which have put off the necessary adjustments time and again. this is where the critics jump in to say that excessive saving damages economic growth. however, i think this is too short - sighted. of course fiscal consolidation normally dampens economic activity. but there is no way the present situation can be described as “ normal ”! in fact, doubts about the sustainability of government finances are probably themselves a considerable drag on growth. the critics are right about one thing, though : consolidation alone is not enough to solve the problems we are facing. secondly, the countries affected by the crisis therefore need to conduct structural reforms in order to become more competitive and to promote economic growth. such reforms are, naturally, difficult and painful. ireland has shown, however, that they are possible, and the german experience has proven that they pay off in the long run. and, thirdly, we need a stable architecture for our monetary union. instead of constantly patching up the results of fiscal policy mistakes and insufficient implementation of the stability and growth pact, the framework of monetary union has to be changed in a way such that sound fiscal policy is also truly guaranteed in future. in my view, there are two options open to the euro area : either we can return to the founding principles of monetary union agreed at maastricht, or we should venture the step towards a deeper european integration which also includes fiscal policy. 3. 1 returning to the founding principles of monetary union regarding the first option – returning to the founding principles of monetary union – i do not share the frequently voiced fear that the current framework is unsuited to monetary union. nevertheless, it does require considerable adjustment. there are three key points here. firstly, the stability and growth pact needs to be given “ teeth ”. in particular, stronger automatism is needed to penalize breaches of the deficit and debt limits. secondly, the no - bail - out principle needs to be reinforced : no member state should be permitted to assume liability for the debt of another member state. financial market investors will only punish bad fiscal policy behaviour promptly if they expect to lose their money. thirdly, the euro area needs a permanent crisis mechanism. recourse could be taken to this mechanism if a crisis erupts and financial stability throughout the euro area is at risk. however, there are three important aspects to note : assistance to individual countries must be tied to strict economic and fiscal policy conditionality, it must only be granted with appropriate

jointly liable for the debts of other euro - area countries but would not be able to keep them in check. however, in this framework, mutual assistance must be granted only as a last resort, must be strictly conditional and must involve considerable interest rate premiums, in order to give countries an incentive to balance their government budgets. 3. 3 financial market reform as a necessary addition national fiscal policymakers are ultimately responsible for convincing market participants to invest in their sovereign bonds. the recent past has served as a painful reminder that the status of sovereign bonds as a de facto risk - free asset has to be defended time and again. and rightly so : the only way to get governments to live within their means is if the financial markets reward good fiscal policy and punish bad fiscal policy. however, in order to have a disciplining effect, the financial markets need a firm set of rules – as was made abundantly clear by the crisis. and significant progress has already been made in adapting the rules. the reform of the capital framework, which will improve the quantity and quality of banks ’ capital and thus their capacity to absorb losses, is certainly a particularly welcome development. increasing the amount of losses the banks ’ investors are able, and required, to take, reduces the danger of taxpayers once again having to foot the bill. the phenomenon of systemically important banks, however, also shows that basel iii is by no means the final step. the internationally agreed rules for dealing with the “ too - big - tofail ” issue now have to be implemented quickly – and in an internationally consistent manner. the oversight and, if necessary, regulation of the shadow banking system remain atop the reform agenda. the laundry list of regulatory reforms continues to be very long, and its details are often so complex that it is difficult to explain to the general public. this opens the door to populist calls for seemingly simple solutions – such as a financial transactions tax. we at the bundesbank are of the view that, if at all, such a tax would have to be introduced at least in all major financial centres. looking at the financial markets and their regulation, however, i would like to mention one more thing. the sovereign debt crisis is shining a new light on a commonly held assumption, namely, that crises are caused by unfettered markets and can be avoided only by giving the state more space. however, the sovereign debt crisis has shown quite clearly that even sovereign debtors can fail. of course, the