up for the euro area as a whole. european financial integration went far ahead any european oversight and financial stability and as a result financial stability was unwittingly sacrificed. 3 how would banking union have helped? by moving supervision and other national financial policies to the european level, the problem can be solved. supervisors can take a euro areawide view of financial developments, identify early the build - up of systemic risks, and use appropriate macro - prudential tools to counteract them. had a single european supervisor existed prior to the crisis, it could have spotted the unsustainable growth in private sector debt and the excessive leveraging of banks ’ balance sheets associated with it – and hopefully taken early preventative measures. mitigating the crisis what about the role of banking union in mitigating the crisis? here i can see two key ways in which it would have been instrumental. first, it would have lessened the so - called “ bank - sovereign loop ” that drags down the fiscal sustainability of sovereigns. this loop is driven by bank bailouts or just by the expectation that sovereigns will have to bail - out struggling banks, which then increases borrowing costs for sovereigns and further drives up funding costs for banks. a single resolution mechanism would avoid this by resolving banks rather than saving them and by making the private sector rather than the taxpayer pick up the bill. moreover, any residual fiscal burden on sovereigns would be distributed across the euro area through the common fiscal backstop. second, a banking union would have reduced the fragmentation in financial markets that holds back bank lending and economic growth. at present, market fragmentation is severely disrupting the transmission of the ecb ’ s monetary policy. in some countries, changes in our main interest rate are being passed on fully by banks ; in others, because bank funding is schoenmaker, dirk ( 2011 ) : “ the financial trilemma ”, in economics letters, 111 pages 57 – 59. bis central bankers ’ speeches tight, interest rate changes are being passed on hardly at all. this is making credit very hard to come by or unduly expensive in some parts of the euro area. banking union would limit financial fragmentation in a number of ways. an impartial supervisor conducting credible stress tests would lessen fears that banks are hiding bad assets in some countries. depositors ’ confidence would be mitigated by harmonising deposit guarantee schemes. and a supervisor with a truly european focus would never undertake actions that can

it is an encouraging signal that financial market participants are apparently prepared to attribute a credibility bonus to our stability - oriented monetary policy shortly before its official start. at the current juncture, the outlook for the euro area economy is still very much influenced by the uncertainties surrounding the evolution of the world economy in 1999. these uncertainties have negatively affected indicators of industrial confidence in the euro area and have fuelled expectations of a slowdown in economic activity in the short term. very recently, a first estimate of real gdp – 3 – growth in the euro area in the third quarter of 1998 has been released by eurostat, suggesting a growth rate of 2. 4 % against the third quarter of 1997. this would be around one - half of a percentage point lower than the average growth rate of 3 % in the first half of 1998, compared with the first half of 1997. other indicators of real activity were mixed up to november. while order books and capacity utilisation point to a less optimistic assessment of growth prospects, consumer confidence remained high and retail sales continued to increase at a broadly stable pace up to september, i. e. the latest month for which data are available. also, the decline in unemployment, after pausing in the summer months, resumed, with the rate of unemployment decreasing from 10. 9 % in september to 10. 8 % in october. the factors underpinning the currently low increases in the hicp continued to include falling energy prices, downward movements in producer prices, subdued wage growth and slight decreases in unit labour costs. on balance, the overall environment described above does not point to significant upward or downward pressure on prices in the short term, as also reflected in all available forecasts for 1999. nevertheless, factors contributing to risks to price stability on both sides need to be taken into account. on the one hand, downward risks relate to the global environment and potential repercussions on the euro area, for example via import prices and further pressure on producer prices. these developments will be monitored closely. on the other hand, unexpected upward pressure on wages and a relaxation of the fiscal stance would clearly alter the general environment. therefore, we will also carefully monitor the outcome of ongoing wage rounds, the plans for fiscal policy in 1999 and over the medium term, as well as their implementation towards compliance with the stability and growth pact. in conclusion, the actual situation, characterised by monetary growth compatible with continued price stability and the absence of immediate upward or downward pressure on prices, justifies