the third is me – and i ’ ve forgotten everything. ” another example is the stability and growth pact. with respect to the annual budget deficit ceiling, the old saying was, “ 3 % is 3 %. ” in the meantime, however, there are now federal states that have been flouting the deficit rule for seven years – and have been able to call upon the exceptional circumstances approved by the european commission. these days, even the experts are hard - pressed to judge whether fiscal rules are being observed or broken. the general public has long since bowed out of this discussion... but what members of the public certainly do understand are the basic principles of the market economy as taught to them by their own life experience. take the principle of individual responsibility, for instance. as walter eucken once put it, “ those who reap the benefits must also bear the costs. ” conversely, however, the principle of liability also means that those who are liable for losses must also be those who, based on their decisions, are responsible for said losses. to illustrate what this means, i always like to draw the following comparison for my audience. imagine that your neighbour were able to go shopping using your credit card and you had no control over what he or she was spending. you would quite rightly say that such a situation is unacceptable – “ i can ’ t be liable for something that i have no control over. ” however, the two propositions “ those who reap the benefits must also bear the costs ” and “ i can ’ t be liable for something that i have no control over ” go beyond the personal level and apply in an institutional context as well. the principle of liability ensures that decisions are made more responsibly. this is also, and especially, true for the institutional architecture of monetary union. when i gave my speech at the volkswirte alumni - club three years ago, i quoted today ’ s keynote speaker harold james, who wrote in his book “ making the european monetary union ” that, without a common fiscal regime and without a stable financial system, the monetary union had a very high centre of gravity that made for vulnerability and instability. bis central bankers ’ speeches to stay with his allegory, the aim of an institutional reform in the monetary union must therefore be to lower its centre of gravity so that it cannot be blown off course so easily. but this will only work if the principle of liability is once again paid greater attention and a balance

frameworks that are in tune with the interconnectedness and complexity of the financial sector. major steps have already been taken in this regard at the international level. the financial stability board has already presented key attributes of effective resolution regimes for financial institutions. these were endorsed by the g20 heads of state and government in november 2011. since then, work has been under way to transpose this new international standard into national law. a draft directive for the recovery and resolution of credit institutions has now bis central bankers ’ speeches been presented at the eu level. this proposal clearly sets forth the sequence of liability for failing financial institutions – shareholders and creditors are now first in line to bear losses, and rightly so. 3. 2 the bank - sovereign nexus nevertheless, there is still another aspect of interconnectedness that has to be taken into account : the link between banks ’ balance sheets and public finances. the crisis has exposed a vicious circle in that connection. if many banks run into financial difficulties at the same time, that can threaten the stability of the entire financial system. governments then often have no option but to bail out these banks to prevent the system from collapsing. this costs a lot of money. look at ireland, for example : rescuing its banks raised the country ’ s 2010 budget deficit to more than 30 % of gdp. by the same token, if government finances run into difficulties, that causes problems for banks – firstly, because many banks have large government bond holdings and, secondly, because the general economic situation initially worsens when a government has to adjust its finances. this feedback loop between banks and sovereigns has to be severed in order to promote financial stability. one measure would be to establish resolution regimes for banks as i have already discussed. having them in place would shield the government from having to rescue banks with taxpayer money. another measure refers to capital requirements for banks, which i have also discussed. the objective is to ensure that banks ’ economic situation no longer depends on the state of public finances. we can only achieve this if we stop giving government debt preferential regulatory treatment over other loans or securities. government debt should be backed with a level of capital which adequately reflects its risks. at the same time caps should be imposed on bank sovereign debt holdings. and on a side note : appropriate capital rules and caps on lending to governments also have a disciplining effect on national fiscal and economic policy. former imf chief economist kenneth rogoff considers this effect to be stronger than that of stricter