emu is economic divergence across the euro area. some countries are now growing well and moving towards a satisfactory economic equilibrium. in others, the economic situation is still very fragile and shows little, if any, signs of improvement. in this respect, the situation is clearly more difficult now than it was during the first ten years of the euro. in a sense of course, economic divergence among the euro area countries is beyond the reach of the ecb. monetary policy is formulated for the whole area of 331 million people. and they all equally deserve price stability, which it is the task of the ecb. however, the problem of growing economic divergence is very serious for the emu as a whole and therefore, it is a matter of concern also for the ecb. the monetary union can work well only if there is sufficient convergence in economic policy and economic performance across the euro area countries. the financial system let me now turn from monetary policy to the financial system : that is, to banks and financial markets. the good health of the banking system is an important condition for sustainable economic recovery. this is the case throughout the world, also for the euro area. perhaps this task is especially urgent for the euro area, because uncertainty regarding the health of banks aggravates the negative effects of economic imbalances and divergence in the area. a clear strengthening of the banks ’ capital base is long overdue. this should be the task primarily of the shareholders of the weaker banks, who should refrain from taking dividends or should inject more capital if needed. in some cases, government investment in bank equity may also be necessary. coming from finland, i understand very well the political problems involved in cleaning up the banking system. in the 1990 ’ s, after the finnish banking crisis, the finnish government had to support an asset management company that handled the banks ’ problem assets, in amounts that at one point reached about 10 per cent of gdp. most of this money was later recovered, but in the meantime taxpayers were furious. the public frustration with the costs of the banking crisis has not been forgotten in my country. despite the short - term discomfort it entails, the resolution of banking problems is necessary for us to move forward to a lasting recovery. on the one hand, the recapitalization of the weaker but viable banks is necessary to restore confidence. on the other hand, the wellmanaged closure of unprofitable banks is necessary, so that they do not

to fail to internalize these positive externalities. this could lead to national macroprudential policies that are overly passive and dangerously weak at preventing the future global financial crises. let me elaborate a bit on this idea. consider a strong upturn of an international financial cycle, during which asset prices climb rapidly, leverage increases excessively and prices of risk decline simultaneously in many countries with interconnected financial markets. this scenario of course resembles the developments in the years preceding the latest global financial crisis. to prevent these risks from materializing into a systemic crisis, national authorities should tighten their macroprudential policies and possibly other economic policies. now, consider the decision - making problem of a macroprudential authority or body in an individual country. this authority may find it difficult to tighten the national macroprudential policy for two reasons. first, there is the well known problem of “ taking the punch bowl away in the middle of the party ”. it has been pointed out that this political difficulty is likely to be even worse in the macroprudential context than in terms of monetary policy : there is at least some constituency that dislikes inflation, but probably none that dislikes the intoxicating feeling of getting richer as asset prices climb higher. second, as i mentioned earlier, a country that tightens its macroprudential policies in isolation would internalize only a part of the financial stability benefits of macroprudential tightening while bearing all the perceived costs in terms of a loss of competitiveness for its financial industry. this may lead to a first - mover disadvantage problem, where no country is bis central bankers ’ speeches willing to be the first to tighten its macroprudential policy unless it knows that other countries are committed to doing the same. unless properly addressed, these disincentives to pursuance of active national macroprudential policies may lead to a bad equilibrium, where global macroprudential policies become stuck in an overly passive stance. this implies that the identification of effective macroprudential instruments – which in itself is a formidable task – does not guarantee that these instruments will be used efficiently. what can we do to avoid this bad equilibrium? i have three suggestions. first, to relieve the extensive political pressure not to take action, we should try our best to develop and improve rules - based macroprudential policy. instruments such as dynamic loan loss provisions used in spain and the capital conservation buffer of the basel iii framework, could work as automatic stab