of these reforms. let me say from the outset that the new legislation, consisting of six parts, the so - called “ sixpack ”, is certainly a step in the right direction. the “ six - pack ” consists of four proposals aimed at strengthening the stability and growth pact and the budgetary surveillance framework, and two proposals which focus on monitoring and controlling macroeconomic imbalances. the key improvements in the eu surveillance framework include : ( i ) the strengthening of the preventive arm of the stability and growth pact, including through the introduction of earlier and gradual sanctions and of an expenditure growth benchmark ; ( ii ) making the government debt criterion of the maastricht treaty operational ; ( iii ) a new sanctions mechanism to strengthen the enforcement of the rules for euro area countries, ( iv ) new minimum requirements for the rules and procedures governing national budgetary frameworks and finally ( v ) the introduction of a new excessive imbalances procedure ( eip ) for the prevention and correction of macroeconomic imbalances. the “ six - pack ”, however, falls short of the “ quantum leap ” that the ecb had long advocated for the euro area. a major drawback is that the new governance package still leaves the council with too much room to apply discretion when deciding on the execution and enforcement of the surveillance procedure. another vital shortcoming relates to the large amount of exceptions and relevant factors that need to be taken into account when it comes to applying the excessive deficit procedure. this creates loopholes and could endanger the transparency and therefore the accountability of the fiscal governance framework as a whole. looking ahead, the identification of the necessary reforms has to start from being clear about what the ultimate objective is : the need to establish institutional arrangements which provide credible incentives for sound fiscal and macroeconomic policies in a monetary union. in my view, a more fundamental deepening of fiscal and economic policy surveillance is necessary in the long run. this would involve a transfer of sovereignty to the european level of decision making, which should have much stronger powers, and would also mean stricter constraints on national budget policies. bis central bankers ’ speeches this kind of reforms would require a comprehensive change to the eu treaty but, above all, an adequate mechanism to ensure their democratic legitimacy. let me outline the ideal cornerstones of such a governance reform. first, to ensure fiscal discipline, all planned deficits of more than 3 % of gdp and those in excess of a country ’ s medium term objective would need to

actions undertaken by the ecb. as the ecb has repeatedly stressed, the main responsibility for resolving this crisis lies with governments and the financial sector. euro area governments ’ unwillingness to adapt their fiscal and competitiveness policies to the requirements of emu very much lies at the heart of the current “ sovereign debt crisis ”. excessive risk - taking by an over - leveraged and inadequately regulated financial sector is, of course, the other source of the present “ financial turmoil ”. i will therefore focus the second part of my speech on a discussion of the main reforms to the governance as well as the supervisory and regulatory frameworks that have been undertaken at the european and international level in response to the crisis. bis central bankers ’ speeches 2. fiscal imbalances and the monetary policy response to the crisis growing fiscal imbalances the economic and financial crisis has led to a severe deterioration of public finances across european countries. governments which already had significant fiscal imbalances ahead of the crisis exited from the recession with the highest deficit and debt - to - gdp ratios recorded in times of peace. the aggregate fiscal balance of the euro area increased from an almost balanced budget in 2000 to a deficit of around 6 % of gdp in 2010. furthermore, the euro area ’ s debt stood at more than 85 % of gdp in 2010. similar developments were also recorded in other advanced economies, for example the us and japan, likewise as a result of the cyclical contraction as well as the adopted fiscal stimulus measures. however, it is useful to consider that the consolidated fiscal position of the euro area remains – overall – rather more favourable than that of the us and japan. according to the commission ’ s spring 2011 forecast, the euro area deficit ratio is projected to decline to 3. 5 % of gdp by 2012 as compared to the us and japan where fiscal deficits are expected to stand at 8. 6 % and 9. 8 %, respectively, in 2012. these forecasts are in line with those of the main international organisations. the interaction between government finances and the financial system despite ongoing fiscal consolidation efforts across euro area countries, negative feedback loops between the financial sector and sovereigns are becoming more and more entrenched. although in some countries it was financial system stress that happened first and later weighed on sovereign risk, in others the events took place in reverse order. regardless of the exact chronology of events, since mid - 2010 we have progressively begun to see a very close interaction between risks associated with the financial system