unemployment rate in the netherlands was the lowest in the euro area. bis central bankers ’ speeches the divergences in unit labour cost developments and price competitiveness within the euro area are reflected in the current account balances of the individual countries. as you can tell from this chart, before the crisis, most southern european countries and, to a lesser extent, ireland experienced high and steadily increasing current account deficits, while the current account surpluses of germany and the netherlands improved further. for many years it was thought that in a monetary union, the current account balances of individual countries were no longer relevant. it was only the balance of payment of the euro area as a whole that mattered. we know better now. of course, besides competitiveness problems, the crisis also had fiscal causes. bis central bankers ’ speeches as can be told from the chart, the stability and growth pact didn ’ t prevent some governments from taking up old habits once they had fulfilled the convergence criteria that enabled them to join emu. we shouldn ’ t forget, however, that this was facilitated by some of the core countries of emu. when it became clear that fiscal policies in these core countries wouldn ’ t be able to meet the rules of the stability and growth pact, it was not the policies that were changed but the pact. this was clearly a mistake. besides, the gradual deterioration of the budget balance in countries like italy and portugal was partly due to their competitiveness problems. since devaluing out of these problems was no longer an option, the decline in competitiveness slowed down economic and employment growth. this dampened tax revenues while stimulating social security expenditures. looking at it this way, the lack of fiscal discipline partly reflected the lack of macroeconomic discipline. more in general, budgetary policy was supposed to absorb temporary cyclical differences, by allowing the automatic stabilisers to do their work. for example, during a downturn, public spending automatically goes up as more people receive unemployment benefits, while tax revenues decrease. such ‘ automatic ’ response to cyclical developments stabilises the economy. but in most member states, the automatic stabilisers have failed to operate properly since 1999. instead, a number of governments followed pro - cyclical budgetary policies, by loosening the budgetary reins during the economic booms, and tightening them during the busts. in other words, budgetary policies have hampered the functioning of emu. budgetary discipline in emu was supposed to be exacted

to solve this crisis. in what follows, i will first focus on the causes of the sovereign debt crisis. i will conclude by presenting my views on the implications for a stable design of emu. since the eurozone crisis erupted, european policy makers have done a lot to restore confidence. important developments include the creation of the emergency facility efsf / esm, i. e. the european financial stability facility and european stability mechanism, to assist vulnerable euro countries during their reform efforts. another significant step is the signing of the fiscal compact, a treaty in which the political leaders of the euro area countries ( and most other eu countries ) further strengthened the rules governing budgetary discipline in europe. the ecb also took unconventional measures to prevent the sovereign debt crisis from severely dragging down the real economy and from frustrating monetary transmission and its efforts to maintain price stability. we first introduced the securities markets programme, or smp, for interventions in the secondary government bond markets of vulnerable countries in order to restore their proper functioning. we also introduced a refinancing operation with a maturity of three years, which injected around eur 500 billion of “ new ” liquidity into the european banking system. bis central bankers ’ speeches this provided the banking system with the liquidity security they needed in light of the market tensions and, thus, helped to avoid a sharp reduction in credit supply to the economy. while these measures calmed markets for a certain period, as the chart indicates, tensions kept returning every time. in my view, this is because the actions of governments and the actions of the ecb were not aligned. in particular, european politicians tended to slow down their efforts after ecb measures had temporarily reduced market pressure. this was especially visible for the smp. instead of stimulating politicians to solve the underlying causes of this crisis, the smp discouraged them to do so. to remedy this situation, the ecb recently replaced the smp with a new instrument for secondary market interventions : outright monetary transactions or omts. the great advantage of omts is that they come with strict conditionality for the countries involved. this is meant to ensure that these countries cannot slow down their efforts after ecb interventions have eased market pressure. the ecb will only intervene in euro countries committed to and complying with the structural economic adjustment programme attached to support from either efs or esm, and the imf. this way, the actions of the ecb and the actions of governments do not undermine, but reinforce each