must ensure that conducting a sound fiscal policy is in the best interests of each individual country – even more so than before the crisis. and, when taking this route, we must not allow the design of the crisis resolution mechanisms to open the door to misguided incentives. 5. 2 core elements of a fiscal union with a substantial transfer of competences from national to eu level the fundamental alternative to strengthening the existing framework would be to undertake a major shift to a fiscal union, involving a partial transfer of fiscal policy competences to the eu. establishing a european fiscal union would not by any means require a complete centralisation of fiscal policy ( including policies governing revenue and expenditure ). in particular, the principle of subsidiarity implies that wide - ranging competences should remain at national level in order to ensure that the arrangements reflect the preferences of the individual countries ’ citizens as closely as possible. in my view, enshrining strict deficit and debt limits for national budgets in eu legislation is pivotal to achieving a stable fiscal union and reliably shielding the eurosystem ’ s single monetary policy from unsound public finances. these limits would then apply to all levels of national government, including central, state and local government and the social security systems ; the eu would need to be granted ultimate powers of intervention to ensure that the limits are effectively implemented in practice. in a fiscal union, these powers of intervention would have to be extensive enough to ensure that national governments lose their sovereignty over fiscal policy when deficit and borrowing limits are breached, if not beforehand. consequently, the national parliaments would no longer have ultimate decisionmaking authority over government budgets ; their decisions would be subject to approval by a central body. i must emphasise that, contrary to public opinion, such a fiscal union would not necessarily have to entail joint liability. in principle, this kind of centralised solution could function successfully without joint liability. this would allow room for somewhat greater flexibility in national borrowing. existing national deficit and debt limits could, in principle, be set and monitored by a democratically legitimised central body, such as the european parliament. it should then be ensured that decisions exclusively affecting euro - area countries are only taken by representatives of these countries. however, the system for setting deficit and debt limits would need to follow consistent rules ; it would have to be rule - based, much stricter than in the existing framework – reflecting recent experience – and should be made difficult to change, for example by requiring large

the euro - area countries, this kind of shift would be almost inconceivable, and it is unclear whether this support actually exists. it is vital not to make the mistake of taking the steps in the wrong order. the increasing misuse of monetary policy in principle, it is possible for monetary policy to safeguard price stability in either a decentralised or a centralised legal framework for monetary union, provided that the chosen system is adequate. however, substantial problems are likely to arise in future if an inconsistent framework is enshrined in law or – perhaps even worse – an inconsistent framework is not re - enshrined in law but is applied in practice regardless of the legal provisions. the momentum of the crisis shows a worrying pattern in this respect, particularly from the point of view of a central bank. insufficient economic and fiscal policy measures in the member states lead to a loss of confidence on the markets, which focus on the new weaknesses. sooner or later the situation escalates, the country in question sees its bond yields rise and has difficulty accessing the capital market. the interest rate rise is all too hastily classified as unsustainable. crisis meetings are then arranged, at which ad hoc measures are adopted and calls are made for monetary policy – which is supposedly the only institution directly able to intervene – to step into the breach to bis central bankers ’ speeches stabilise the situation in the short term. the situation becomes yet more problematic if neither the countries concerned take measures to remedy the situation nor the countries potentially providing assistance wish to take on risks. monetary policy certainly does have tools that can calm the financial markets in the short term. however, taking such measures can blur the boundaries between the responsibilities of monetary and fiscal policy and overstretch the mandate of an independent central bank. in addition, they threaten to perceptibly weaken incentives for fiscal policymakers to take action themselves. this in particular can subsequently lead to a delayed or inadequate implementation of fiscal policy measures, bringing us full circle and triggering a downward spiral in which monetary policy is left “ holding the baby ”. it is certainly true that central banks, too, have to learn lessons from the crisis and rethink fundamental positions. i believe that one key lesson is, as i have mentioned already, the primary importance of efficient financial market regulation and supervision for an efficient framework for monetary union and, in particular, for a stability - oriented monetary policy and its interplay with the financial markets. i am also