its price competitiveness significantly since the launch of the euro, the current account deficits in greece, spain and portugal and to a lesser extent in ireland were accompanied by significant losses in price competitiveness : the lower interest rates brought about by monetary union and inflowing capital had partly fuelled unsustainable developments, such as excessive credit dynamics and real estate bubbles in spain or excessive fiscal spending in greece. the resulting domestic boom and existing labour market rigidities led to large wage increases well in excess of productivity growth, triggering a loss in price competitiveness and thereby impairing export performance. current account deficits were therefore ultimately a symptom of countries living beyond their means. the deficits will only decline if ambitious and often painful adjustments are undertaken that bring these economies back on a sustainable track. what about germany? at first sight, germany ’ s gain in price competitiveness since monetary union seems quite large. however, it is important to bear in mind that this increase followed a period of rather weak economic performance in the 1990s after germany ’ s reunification boom. the most recent competitiveness gains and the resulting impulse for exports were the consequence of a painful but necessary and ultimately successful adjustment process. an important part of this process was a restructuring in the corporate sector, which significantly enhanced the profitability of firms. in addition, there were major and long overdue policy reforms, namely labour market reforms, fiscal consolidation and adjustments in the social security systems. consequently, and in contrast to some other surplus countries, germany ’ s current account surpluses were certainly not caused by policy interventions aimed at boosting exports. instead, they resulted from market - driven adjustments to external pressure as well as overdue structural reforms. it is true that the restructuring process has fostered the emergence of current account surpluses by putting a strain on domestic consumption. as the restructuring process was temporary, however, german current account surpluses are not expected to reach pre - crisis levels soon again. in addition, germany ’ s experience should provide some reassurance to those countries faced with the need to restore their competitiveness : structural reforms can initiate necessary adjustments and will pay off in the end – thanks to its reforms, the german economy was much stronger in the years preceding the crisis than before. bis central bankers ’ speeches 3. economic spillovers during the crisis and the recovery not least for this reason, germany was able to serve as an anchor for stability within emu throughout the crisis as well as in the current recovery. because

strict fiscal rules laid down in the stability and growth pact and the “ no bailout ” clause, which, by ensuring that each country ultimately has to bear the consequences of its own fiscal policy, is an indispensable prerequisite for sound public finances within the euro area. the severity of the sovereign debt crisis in some member states and the imminent risks of contagion for other member states, however, have threatened financial stability within the european monetary union as a whole. the european council therefore agreed that financial assistance should be granted to countries with severe refinancing problems, a substantial part of which is provided by germany. this financial support is intended to buy time for the affected countries to conduct necessary structural reforms and implement consolidation measures in order to regain market participants ’ confidence in the soundness of their public finances and their competitiveness. the assistance is therefore bound to adjustment programmes, which each recipient country has to fulfil. however, the reduction of interest payments on the financial aid has weakened the incentives for countries in an adjustment programme to re - establish sound public finances via fiscal and economic reforms and return to the capital market. furthermore, the conditionality of the support measures has been loosened by the recent decisions of july 21st. this weakens the underlying principle of european monetary union that each country has to bear the full consequences of its own fiscal policy. contrary to what is actually needed in order to overcome the sovereign debt crisis, we risk seeing the propensity for excessive deficits rise even further in the future. germany ’ s debate about the way forward in the crisis is therefore motivated by a serious concern for the stability of monetary union. we will not be able to regain stability within emu without re - establishing the credibility of its framework. a fundamental political decision is therefore needed : either the existing policy framework of emu has to be changed fundamentally or the incentives for sound fiscal policy have to be strengthened within the existing framework. the first option would imply emu member states abandoning a substantial part of their national sovereignty over fiscal policy and would therefore require fundamental legal changes on the european and possibly also the national level. the second option requires a return to the fundamental principles of monetary union, with each member state bearing the consequences of its own fiscal policy decisions. either option would be sustainable from an economic point of view. however, combining elements of both options, ie sharing the risks of unsound fiscal policy and retaining national sovereignty over fiscal policy, is condemned to failure. it would undermine