” of financial exuberance. central banks should be equipped with a broad - based analytical framework in which such developments are monitored and analysed in detail. at the ecb, this framework is provided by the monetary analysis, the second pillar of our monetary policy strategy. demand in the global economy also needs to be better balanced geographically. there is a broad consensus that national saving in the united states and other deficit countries needs to increase. this can be achieved through a strong commitment to fiscal consolidation, in conjunction with increased household saving. however, a rebalancing also requires stronger domestic demand elsewhere. this will require reforms in emerging asian economies, most notably in china, to boost domestic demand, by developing financial systems, and by increasing spending on social safety nets to reduce households ’ precautionary saving. greater exchange rate flexibility in some countries is a further necessary step towards achieving more balanced global growth. finally, governments need to intensify structural reforms in order to enhance the growth potential of their economies and their capacity to generate jobs. this is particularly relevant in the case of the euro area, given its relatively balanced current - account position and limited role in global imbalances. in the longer run, growth will depend, among other things, on the amount of innovation and the degree of market flexibility. key challenges for europe are boosting productivity and innovation and removing existing labour and product market rigidities. these objectives have been at the core of the political agenda since the launch of the lisbon strategy in march 2000. the policy - makers ’ task of addressing the reform challenges is not easy, yet a broad set of measures is already taking shape at the global level. following the crisis, the g20 has emerged as the premier forum for international cooperation. at recent g20 meetings, a framework for sustainable and balanced growth has been agreed upon and preparations for its implementation are under way. key features of this framework should be : a medium to long - term orientation ; refraining from calls for macroeconomic fine - tuning ; commitment to stability - oriented macroeconomic policies ; achieving a more balanced pattern of global growth. a sound and robust financial system is needed to strengthen the resilience of the global economy. the existing institutional framework for ensuring financial stability needs to be improved and supervision and regulation enhanced. a number of reform initiatives have been undertaken in this respect, their key aspects being : strengthening capital standards and mitigating pro - cyclicality ; reforming compensation practices to avoid incentives for excessive risk - taking

shocks. banks became mired in painful but necessary balance sheet repair efforts. as a result, they have been restrained in supporting economic recovery. banks ’ crucial role in the financial intermediation of the euro area explains why many monetary policy interventions during the crisis were aimed at repairing the bank lending channel. the ecb was confronted with a systemic liquidity squeeze, and had to accommodate the funding needs of the banking sector. as such, we averted a self - fulfilling solvency crisis and resulting monetary contraction. nevertheless, many euro area banks lost their willingness and ability to keep pumping credit into the real economy. this required further flexibility in our policy framework, such as targeted long - term refinancing operations and a negative interest policy. partly as a result of these extraordinary measures, the monetary transmission is working more smoothly. lending rates have eased, and the credit supply has picked up. to sum up, the crisis illustrates the importance of quickly restoring the banking system, both for the real economy and the effectiveness of monetary transmission. it has also exposed the limits and downsides of monetary instruments. central banks can provide liquidity support but cannot restore the solvency of banks. excessive reliance on central banks in fact delays the necessary adjustments. cheap funding may prop up non - viable banks for too long, while making them less and less resolvable. the significance of resolution for the monetary and banking unions is without question. in the euro area there are clear further constraints to resolving banking problems. unlike the us, there is no single fiscal policy that can dampen shocks across member states. and unlike the us, we do not yet have a single deposit insurance system that can provide confidence to all depositors, even if an idiosyncratic shock hits a particular member state. also, capital markets as alternative to bank intermediation are relatively underdeveloped compared to the us. hence, to ensure the stability and sustainability of the euro area, making banks resolvable is essential. as this session is about the road ahead for resolution, let me raise two specific issues for discussion. the first one concerns pressure on regulators to soften rules designed following the financial crisis. it is often said that financial regulation moves like a pendulum, swinging back and forth between opposite states. when a crisis occurs, there is a call for tighter rules, and the pendulum swings. over time, as memory fades, there is a push for deregulation and fewer rules. thus the pendulum swings back, possibly so