systems ultimately rest. over the past 70 years, financial markets have worked on the assumption that public debt in advanced economies was, indeed, risk - free. that basis has now been shaken, both by psi in europe and the debate on the debt ceiling in the us. we used to think of public debt in major countries as a riskless asset. not anymore, or at least not to the same extent. the immediate effects seem benign so far in the us, which remains the deepest and most liquid bond market in the world. in europe, by contrast, there have been more dramatic consequences. once credit risk has entered into sovereign bonds, a fundamental element of instability has been introduced. this is why, unfortunately, the strong statement made in the communique of the euro area heads of 21st july that greece was a unique and exceptional case did not impact the market and was followed by an increase in sovereign spreads for all peripheral countries. a second, more recent, decision may have contributed to intensifying the current turmoil. it was rightly decided by european regulators, under the auspices of the european banking authority, that banks should hold more capital to face increased uncertainty in the current environment. a deadline was set for them to achieve a 9 % core tier 1 ratio, based on a commonly agreed definition of capital. unfortunately, however, calibration for this exercise explicitly incorporated a mark to market assessment of each bank ’ s exposure to sovereign debt. although this element of the calibration was deemed to have been done once and for all, just for the purpose of calculating an additional capital cushion above the objective of 9 %, the market considered the risk that it might be repeated in other circumstances. this created a powerful disincentive to hold, let alone acquire, such debt, since banks felt they could be penalized in the future. banks are major actors on the sovereign bond markets and it is certainly no coincidence that liquidity dried up and spreads went up in most markets in the days following that decision. policy responses cumulative and destabilizing dynamics need to be addressed by a conjunction of complementary actions. first, it is essential to stabilize european bond markets. we have to recognize that the necessary degree of fiscal adjustment is heavily dependent on the level of market confidence. this has been well recognized by france with the recent eur 18 billion consolidation package for this year and 2012, consisting notably of tax benefit reductions, vat increases and an acceleration of the pension reform. but we also know

also be possible to do so. in belgium the debate on the reform of corporate tax, for example, has been going on for quite some time. there is still a heavy reform agenda. much still needs to be done and not everyone agrees on how to go about it. the risk is that the appetite for reform will wane as the economy improves. people have a tendency to lean back and take a break. is that what ’ s happening in belgium now? not only in belgium. there is a sort of honeymoon atmosphere. times have been hard and people would like to take a break from reforming and enjoy the improvements for a while. there ’ s a kind of reform fatigue. but not everyone is enjoying the recovery because unemployment is still too high and there are differences in contracts between insiders and outsiders, etc. but it has to happen, because monetary policy can ’ t fix everything. france is a good example. the financial situation there was not much different to that in germany. there was no banking crisis in france. but growth has been weaker in france than in germany, because german industry was able to adapt, to focus on new markets – first china, then the united states. they have more smes that are export oriented, whereas french industry is much more dependent on a number of national champions. this shows that there are limits to what monetary policy can do. critics are saying that the ecb ’ s low interest rate policy is reducing the incentive to reform. governments should have made more use of the low interest rates. but the fact that there has been too little reform isn ’ t because low interest rates are making it easier for them to muddle through. rather, it ’ s because they aren ’ t managing to sell the reforms. i talk to politicians regularly and they all know what needs to be done. but they are also afraid that they won ’ t get elected again afterwards. i hope that the general public, through seeing better and better results, will start to grasp the importance of reforms. will the [ rise of the far left ] ptb party in wallonia have a major impact? yes, i ’ ve seen it. but take macron : he ’ s been able to build a movement because there was a window of opportunity to go for reforms. but that has nothing to do with the interest rate. in france the public voted for macron because they want changes, but we have yet to see which ones will actually get through. in belgium the government