stimulate economic activity and government intervention to support the financial sector have had a substantial impact on public finances. according to the european commission ’ s january 2009 interim forecast, which is cited in the ecb ’ s annual report, the euro area general government deficit was expected to increase from 1. 7 % of gdp in 2008 to 4. 0 % in 2009 and 4. 4 % in 2010, with ten euro area countries forecast to be above the 3 % of gdp reference value in 2010. more recent information indicates an even stronger fiscal deterioration. the current focus of fiscal policy on economic recovery is certainly warranted ; but this should not undermine the integrity of the eu fiscal framework. especially in challenging times such as these, it is crucial to preserve the public ’ s trust in the sustainability of public finances. this requires that governments are credibly committed to achieving sound fiscal positions as soon as possible and to fully applying the provisions of the stability and growth pact, which provides sufficient flexibility to deal with adverse economic circumstances. financial stability and supervision let me now focus on the financial sector and issues related to its regulation and supervision. the synchronised deceleration in activity in all economies has added to the stresses on the financial system in europe and the euro area. the weakening of economic activity has impaired the quality of bank loans, which has adversely affected banks ’ capital positions. as financial institutions continue to deleverage their balance sheets, they reduce their securities holdings and tighten the credit standards applied to new loans. this feeds back to the real economy and in turn constrains the ability of the private sector to service its debts. therefore, there are emerging signs of a negative feedback loop between the real economy and the banking sector. initially, the banking system in europe faced the financial turmoil with solvency positions generally well above regulatory minimum requirements, following several years of strong profitability. however, as the financial market tensions intensified in the autumn of 2008, banks ’ balance sheets came under significant pressure, as the values of structured finance products declined further, securitisation activity came to a virtual standstill, credit losses started to rise and income from fees and commissions as well as trading dropped. as a result, the banking sector has been facing significant challenges. for example, the declared cumulated write - downs and credit - market losses of european banks so far 1 amount to almost usd 358 billion – of which euro area institutions account for less than usd 173 billion. at the same time, a total of

now address the following two questions, while offering some reflections along the way : • what is being done to fix the root causes of the crisis? • how do we shore up banks and what will the european banking union achieve? what is being done to fix the root causes of the crisis? an important lesson from the sovereign debt crisis is that the “ uniqueness of emu ” embeds systemic risks. it ’ s not possible to partake in a strong single market and a strong single currency vis - a - vis weakly coordinated national fiscal policies, economic policies and financial arrangements. for example, at present, the single monetary policy is still transmitted in a regime of national banking regulation, supervision and resolution settlement. another lesson is that we need to secure consistency between the various institutions, rules and instruments which now shape our political economy. thus, while the crisis was still unfolding, policymakers started to redesign the euro area. the most visible elements are a crisis management and resolution framework. there are five adjustment programmes for greece, ireland, portugal, spain and cyprus. they are jointly supported financially by the european financial stability facility ( efsf ) and the permanent european stability mechanism ( esm ), plus the imf. such risk - sharing in turn requires a strengthening of the governance framework to counter the moral hazard inherent in such an insurance scheme. and this is precisely what we have seen over the last three years. there is a new governance to restore fiscal sustainability and prevent or correct macroeconomic imbalances. the stability and growth pact has been tightened up by the so - called “ six - pack ” of economic governance measures, including the macroeconomic imbalance procedure. they, in turn, have been complemented by the “ twopack ”. programme countries are undertaking painful domestic adjustment programmes which show first signs of getting them back on a sustainable track. something new emerged at the june 2012 summit of euro area leaders : glimpses of a shared european vision for a coherent and viable architecture of emu. the presidents of the european council ( herman van rompuy ), the eurogroup ( then jean - claude juncker ), the european commission ( jose manuel barroso ) and the ecb ( mario draghi ) drew up what see also mongelli ( 2013 ) “ the mutating euro area crisis : is the balance between “ sceptics ” and “ advocates ” shifting? ”, ecb occasional paper no. 144, at http : / / www. ec