. thus, policy makers should make good use of the time that monetary policy is buying. and indeed, europe is proceeding with a comprehensive reform agenda to tackle the root causes of the remaining challenges. one of these challenges is the close link between banks and sovereigns. breaking this link is important for making the euro area more stable. to achieve this objective, we have to adjust the regulatory treatment of sovereign exposures over the medium term. two steps are important : first, an upper limit for banks ’ exposure to individual sovereigns should be introduced. second, banks ’ investments in sovereign bonds should be backed with capital. but there is more to do. a banking union can represent another major step to break the link between banks and sovereigns. centralising supervisory powers over large banks can foster bis central bankers ’ speeches a comprehensive view and unbiased policy action that is not held hostage by national interests. a first step in this direction will be the balance sheet assessment under the auspices of the ecb. it is important to conduct this exercise in an impartial and unprejudiced manner. the german banking industry has already spent considerable efforts on cleaning its balance sheets – some as part of the commission ’ s state aid decisions, some in reaction to eba stress tests, some for other reason. thus, banks are in a better condition now than they were a few years ago. i am not afraid of huge surprises. but for all banks subject to the assessment it cannot be excluded that problems still remain. we need to uncover and address these problems now, before the single supervisory mechanism is launched. meanwhile, a comprehensive banking union has to comprise more than just an effective single supervisory mechanism. it needs to be complemented by a single resolution mechanism. this is a necessary step to solve the too - big - to - fail - problem. large banks must be able to fail without endangering the stability of the whole system. otherwise, the government would have to step in to prevent a systemic crisis. this would create an asymmetry : heads, banks win, tails, taxpayers lose. against this backdrop, establishing a clear hierarchy and minimizing discretion in the handling of bank creditor bail - ins is indispensable to win back lost trust. based on the eu finance ministers ’ agreement of june 2013, the recovery and resolution directive is now close to being adopted. it might ultimately turn out to be a net positive, as it provides clear orientation for markets. moreover, it

andreas dombret : current developments in europe introductory remarks by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the german embassy, paris, 11 december 2013. * * * ladies and gentlemen let me kick off the discussion by offering some thoughts on the current state of play in europe, and the euro area in particular. many challenges have by now been overcome, yet some still remain ahead. let me mention a few of them. first, the markets are still concerned about the quality of banks ’ balance sheets and possible forbearance policies. the lack of transparency about true asset quality is certainly an issue. price - to - book ratios of less than one testify to this. second, it is true that we have seen significant improvements in market access and funding costs during recent months. however, signs of fragmentation between the so - called periphery and other countries of the euro area are still evident. that is, financing conditions for sovereigns, banks and corporates continue to diverge along national borders. third, in many parts of europe the necessary deleveraging process still has to continue. the corporate and private household sectors in some european economies are still riddled with debt from previous exuberance. likewise, public deficits and sovereign debt levels are uncomfortably high in many countries. finally, growth, when measured on an annual basis, in the euro area remains subdued. the european commission expects euro area real gdp to shrink by 0. 4 % in 2013. and in 2014, growth may well amount to a mere 1. 1 %. this adds to the challenges facing bank balance sheets and public finances. so, is it all gloom and doom? far from it, i would argue, as long as policy makers take the right steps. let us take a short look at what has been done so far and what remains to be done. let me begin with the issue of monetary policy, as you would probably expect from a central banker. only few would dispute that the measures taken by the eurosystem have greatly reduced tail risks in the financial markets. however, i cannot conceal the concern that these measures come with diminishing rates of return. in fact, we may soon reach a point where their risks outweigh their benefits. in the end, monetary policy cannot solve the crisis. everyone agrees on this. all monetary policy can do is to buy time. and in doing so the eurosystem has entered unchartered and dangerous territory