stability, coordination and governance which establishes a comprehensive new “ fiscal compact ” including a requirement for national structural deficit not to exceed 0. 5 % of gdp. these new rules must now be fully implemented by each country. – besides, europe has equipped itself with an instrument to combat crises. at the last european council meetings, it was decided to bring forward the creation of the permanent european stability mechanism ( esm ) to july 2012, and to make it more powerful, increasing the lending capacity of the esm to usd 1 trillion. it is absolutely necessary that this strong tool becomes fully operational as soon as possible. i believe that there is another very important reason why the euro area has been so badly hit by the crisis ; it is because we are a very highly integrated economic area but do not have the appropriate institutional mechanisms for this integration. in particular, this explains the contagion effects and the negative feedback loops between banks and states, which have made matters much worse in the area. obviously, a good and coherent functioning of the banking sector is absolutely vital for an overall solution to the euro area crisis. this conviction is based on two fundamental observations : – appropriate financing is essential for our economies to achieve strong and sustainable growth. in europe, the banking system is the main source of financing, and hence its strength is of crucial importance. however, financial markets naturally also play a key role and they should focus on serving the economy. bis central bankers ’ speeches – secondly, financial stability is critical not just for creating the right conditions for the appropriate financing of the economy. it is also an extremely valuable asset in fostering confidence, which has been severely lacking in recent years and is another key condition for growth. it is also a vital condition for the effectiveness of monetary policy as it allows the normal functioning of transmission mechanisms. in addition, given the feedback loop between banks and sovereigns and the potential impact of a financial crisis on a country ’ s fiscal position, financial stability makes a major contribution to fiscal stability. a smooth functioning of the banking sector is therefore clearly an essential element in the resolution of europe ’ s problems. as a central banker and supervisor, i see three major tools which can help to ensure appropriate financing of the economy and financial stability – both of which are essential financial conditions for sustainable growth. 1. financial regulation and supervision must be tailored to the two objectives of strengthening the financial sector while ensuring an appropriate financing of the economy. of course, after the 2008 financial crisis, the most urgent priority

are the fiscal problems and difficulties in the banking sector in spain – but the plan adopted over the weekend should respond effectively – and, above all, the major political uncertainty in greece. therefore, there is a tremendous amount of work to do on a number of fronts if europe is to find a durable solution to the crisis. bis central bankers ’ speeches the challenge for most individual euro area countries is obviously to achieve strong fiscal consolidation while ensuring long - term growth. clearly for me, there is no contradiction between these two objectives. on the contrary, they are complementary. the efforts already made on the fiscal front by the euro area are already bearing fruit : not only is the absolute level of the euro area ’ s deficit half that of elsewhere, but also the pace of fiscal consolidation is actually much greater. it is clearly an asset for us today and an element of confidence both for the markets and economic agents, which needs to be further enhanced. but, by the same token, countries need to create the conditions for a strong and sustainable growth through strong structural reforms. here as well, the progress already made in many countries is important but more needs to be done, notably with regard to the labour and goods and services markets. beyond these national efforts, i believe that what the euro area really needs today is to make progress towards a more coherent and integrated economic and financial union. indeed, the crisis has clearly brought to the fore a number of weaknesses in the functioning of the euro area and has thus fuelled concerns. first, the fiscal discipline mechanism through peer pressure as established by the stability and growth pact proved to be weak. second, the euro area did not equip itself at the outset with an instrument for monitoring competitiveness. third, the euro area had not put in place a resolution mechanism before the beginning of the crisis. i believe that important decisions have been taken on these three points, which should bring significant improvements if they are fully implemented : – europe has considerably enhanced its fiscal discipline framework. the legislative package ( the so - called “ six pack ” ) entered into force in december and considerably reinforces the stability and growth pact : the surveillance powers of the european commission over national budgets have been enhanced, sanctions have become quasi - automatic, the criteria for public debt and public spending are being more closely scrutinised and a new framework for the surveillance of macroeconomic and competitiveness imbalances has been put in place. in addition, 25 european heads of state or government signed the treaty on