countries that are catching up economically. in our case, however, the inflowing capital did not finance a sound catching - up process. instead, it financed house price bubbles in some countries – such as ireland and spain. elsewhere, it funded excessive government consumption – for example, in greece. the inflowing capital did not fund sound growth : instead, it masked an existing lack of competitiveness and, in fact, made it even worse. and it was precisely these structural problems that were the breeding ground for the crisis. bis central bankers ’ speeches what was the situation at the european level? here, it was mainly shortcomings in the framework of monetary union that laid the ground for the crisis. in order to understand these shortcomings, it is important to know the particular features of monetary union. the european monetary union is special because it combines a single monetary policy with national fiscal policies. the monetary policy for the 17 countries of the euro area is decided by the governing council of the ecb in frankfurt. however, the fiscal policies of the 17 members of the euro area is a matter for the national policymakers – each country decides itself on its own government revenues and expenditures. given such an imbalance of responsibilities, the individual countries have incentives to borrow. you see, the costs of borrowing are spread across all the member states of the monetary union – for example, by means of a higher interest rate level for all of them. this incentive to borrow, this “ deficit bias ”, was also recognised by the founders of the monetary union. in order to reduce it, they did two things. first, they created explicit rules on borrowing in the form of the stability and growth pact. this pact was intended to keep a tight check on national fiscal policies. second, the founders of monetary union incorporated the “ no bail - out ” principle into the maastricht treaty : no euro - area country was to be liable for the debts of another member state. thus, individual responsibility was to be the guiding principle for fiscal policy in the monetary union. each country was itself to bear the consequences of its own fiscal policy. these rules were intended to keep borrowing by the euro - area countries within reasonable limits. but rules were not the only means of achieving this. the financial market actors, too, were to ensure that that the euro - area countries did not incur excessive debt. the idea behind this is simple : if a country were to become excessively indebted, it

would only be able to borrow on the financial markets in future at very high rates of interest. this means that the country in question would have to reduce its debt to a sustainable level. yet, neither of these two safeguards worked. neither the discipline of the financial markets nor the rules were able to prevent individual countries running up excessive debt. investors on the financial markets tolerated the problems of individual countries for far too long. at the same time, policymakers stretched and sometimes ignored the rules of the stability and growth pact. and then, in 2008, came the global financial crisis. many countries had to rescue their banking systems and support economic activity. and that dramatically drove up their levels of sovereign debt. and, suddenly, the investors on the financial markets seemed to become aware of the problems which some countries were experiencing. now they saw the high level of sovereign debt, the lack of competitiveness and the risk of contagion effects between the individual countries. in short : they lost confidence in the crisis - hit countries. but this also meant that capital flows dried up – the capital flows that had previously covered up the problems. and that brings us to the statement by the eurogroup that i quoted when i began my speech. in order to safeguard financial stability in the monetary union as a whole, rescue packages were set up first for greece, then for ireland, portugal, for the spanish banking system and, finally, for cyprus. at the same time, central banks took various non - standard measures in order to stabilise the situation – i shall return to this point later. bis central bankers ’ speeches in an exceptional crisis, taking exceptional measures is undoubtedly the right thing to do. however, looking to the future, neither course can provide a permanent solution to the crisis. neither the rescue packages nor monetary policy can remedy the basic underlying problems that i have just mentioned. 3. looking forward : ways out of the sovereign debt crisis in order to achieve that, three things are necessary. first, government finances have to be put back in order ; second, competitiveness has to be improved ; third, the framework of monetary union has to be strengthened. let us look at these three necessities in more detail. 3. 1 budget consolidation and structural reforms many euro - area countries have very high levels of sovereign debt. in greece at the end of 2012, it was roughly one and a half times annual economic output. and in other member states, too, sovereign debt is well above annual economic output