causes of the current sovereign debt crisis are unsustainable fiscal policies, i want to emphasise that this calls for a clear strengthening of incentives for prudent and sustainable fiscal policies. the introduction of common bonds in the euro area would, however, clearly weaken such incentives without offering a long - term crisis resolution. let me give you three main reasons for that : firstly, the fact that financial markets demand higher yields to fund governments with weak fundamentals clearly provides the right incentives for governments to ensure sustainable finances. credible fiscal consolidation and prudent levels of government debt are in general rewarded, whereas large budget deficits and mounting government debt are penalized in the form of high credit risk premiums. eurobonds would eliminate this incentive mechanism as governments would face the same funding costs regardless of the state of their public finances. secondly, the introduction of eurobonds would also not lead to lowering the costs of the current sovereign debt crisis ; it would simply redistribute them. common euro area bonds imply a transfer from countries with solid public finances – as they will no longer benefit from lower funding costs – to those with weak ones. unsustainable fiscal positions can no longer be punished by high credit risk premiums. this redistribution aggravates exiting moral hazard problems and undermines the long - term fiscal sustainability in the euro area. on top of this, via common bonds strong and weak countries enter into mutual obligations of very large size. this carries the risk that the sound countries will be taken hostage, e. g. to accept a gradual erosion of commonly agreed fiscal rules. thirdly, it is not clear at all whether an introduction of eurobonds would really help to resolve the sovereign debt crises. part of the government debt in the euro area would of course be converted into common euro area bonds. the remaining part will, however, still need to be funded the old - fashioned way – by means of standard sovereign bonds. whether financial market participants would be willing to buy and hold sovereign bonds of countries with weak fundaments is by far not sure, also given the current level of risk aversion. in an extreme case, we might see a complete flight out of individual sovereign bonds towards eurobonds, which would rather lead to a worsening of the sovereign debt crisis and not to its resolution. eurobonds do not offer a solution of the sovereign debt crisis and are not a viable instrument of government financing. maybe it is worth remembering that all the

focused and concise to draw the attention of the policy makers and the broader public to the emergence of macroeconomic imbalances at an early point in time. let me be frank : the governance package is an important step forward. but, and this is unfortunately a big “ but ”, it still leaves a large room for discretion in the execution and enforcement of the surveillance procedures. the effectiveness of tools and measures that are thankfully contained in the six pack, is contingent on their implementation, not just in letter, but also in spirit. the track record on implementing the surveillance mechanisms is less than stellar. this applies to both the commission in presenting sufficiently strong proposals and recommendations, and the council in exerting peer pressure. i see, therefore, high “ implementation risks ”. the many exceptions and relevant or special factors that need to be bis central bankers ’ speeches taken into account at different stages of the procedure unfortunately reinforce these doubts. therefore, the ecb regrets that one of the key aspects of the quantum leap in economic governance that it was advocating – greater automaticity in decision - making through the use of reverse qualified majority voting to the maximum extent possible – was only partly achieved. i call also on this committee to use the new tools that are at its disposal, such as the “ economic dialogue ”, to enhance transparency and promote peer pressure and market discipline. equally, the european semester should be improved further, to make a useful tool of ex ante surveillance, and the ongoing discussion parliament can exert pressure in this regard. ultimately, however, what really needs to change is the mindset of all parties involved in surveillance : they have to assume the full responsibility for the smooth functioning of emu. this means internalising what it means to be part of monetary union, exerting strong peer pressure when necessary, and being ready to take the guidance received from their peers or the supranational institutions. the real question is whether this more fundamental change can come about without some more fundamental shifts in competencies. as jean monnet, who is probably often cited in this house, said “ i have too often observed the limits of coordination. it is a method which promotes discussion, but it does not lead to a decision. ” and yet the management of the euro area economy needs effective decisions, and not just inconsequential discussions. this leads me to my second point. 2. longer term reforms in the economic governance framework current developments clearly show the need to reach a new