roughly 4½ %, and in switzerland only 3 %. excessive government debt therefore represents a massive threat to price stability. putting an effective limit on government borrowing is thus a primary pillar of any policy of stable money. monetary union, as a union of stability, therefore required sound public finances. having said that, it soon became clear that calling for sound public finances would not be enough. a requirement of this kind had to be reinforced by fiscal rules. in this context, a part was played by the following considerations. first, the finding that public budgets have a tendency to excessive borrowing ; think, for instance, of the theory of political business cycles. second, the concern that governments in a monetary union have an even greater incentive to borrow because the costs of an unsound policy can be spread more widely. and, third, from the outset there was the fear that, despite the no bail - out principle, market discipline on its own would not be enough to control such a tendency to incur debt. 3. monetary union and crisis the framework of monetary union was quite coherent, it reflected well - established regulatory policy principles, and the attempt was made to learn the lessons and not to repeat the errors of the past. nevertheless, the crisis has shown that, in some places, this framework was too weak. the fiscal rules, for example, lacked the necessary bite. instead, the reform of the stability and growth pact in 2005 in fact saw some of its teeth drawn as a result of political influence. at the same time, the disciplining effect of the financial markets was even smaller than had already been feared. at times, the risk premiums for government bonds from the countries now in crisis shrank to a few basis points. the fiscal rules and market discipline were thus too weak, and many euro - area countries ran up too much debt. in any event, the dangers that excessive government borrowing posed to monetary union were at least recognised. the dangers of unsound macroeconomic developments, on the other hand, were largely blanked out. it is true that the 1989 delors report warned about potential imbalances resulting from the adjustment process after completion of economic and monetary union or from differing economic policy stances. in contrast to the field of fiscal policy, however, there were no precautions to limit such risks. thus, in the run - up to the crisis, housing bubbles and large current account deficits emerged, while many countries ’ competitiveness deteriorated. we see these developments

fiscal union ; or, in the sense of a return to the maastricht framework, we strengthen the liability and independent responsibility of member states. taken to its logical conclusion, this also means that we cannot – and must not – rule out the possibility of sovereign defaults. as things now stand, however, it is not quite clear which of these two directions policymakers are leaning towards ; they seem to be performing a balancing act, with one foot in the maastricht world and the other in a fiscal union. in the long run, such a balancing act is painful and unhealthy. 4. 2 the role of central banks while policymakers vacillate, expectations of central banks increase. the eurosystem is being cast as the only actor on the european stage with any ability to take any meaningful action. accordingly, there are ever - increasing calls for the eurosystem to do even more to resolve the crisis. i consider this a bad idea, for two reasons. first, the eurosystem cannot resolve the crisis. the causes of the crisis are structural, and are to be found at the individual member state and the european level. in an interview with the german daily newspaper frankfurter allgemeine zeitung, the former imf chief economist did not mince his words : “ we have to fix the underlying structural problems. this will take time, but short - term policies just won ’ t work. that is an insult to people ’ s intelligence. ” i have already mentioned some of these problems. only policymakers can solve these problems ; central banks cannot. to that extent, the discussion surrounding an allegedly overvalued euro is just a red herring to divert from the real challenges. bis central bankers ’ speeches quite apart from the fact that the relevant indicators are not pointing to major overvaluation, even despite the euro ’ s recent appreciation, policymakers should adhere to the tried and tested assignment of roles. experience of politically motivated depreciations in the past has shown that these generally do not lead to any lasting gains in competitiveness. often, renewed depreciations are necessary. if more and more countries try to depress their own currency, this can culminate in competitive devaluation, which will only produce losers. the ecb ’ s first president, wim duisenberg, pointed out something in 1999 – in a speech held in paris, by the way – which still stands today : the eu