is around 1 %, compared to 1½ % in the uk. and yet, the euro area ’ s fiscal deficit is half that in the uk. it structural deficit, according to the imf, is less than one third as large. it is difficult to avoid the conclusion that, if the euro zone were a country, fiscal policy would be substantially more supportive. however, it is tighter than in the uk, even though europe still lacks other effective risk sharing mechanisms and is relatively inflexible. a more constructive fiscal policy would help recycle surplus private savings and mitigate the tail risk of stagnation. it would also bridge the drag from structural reforms on nominal spending and would be consistent with the longer term direction of travel towards greater integration. it would be bold, and it would be favoured by fortune. bis central bankers ’ speeches 5. conclusion jim flaherty understood the importance of having a plan, and implementing it diligently and clearly. not just because, as policymakers, that is our job. but also because in the absence of such a plan, businesses and households would shy away from the risk - taking we need for a sustained global expansion. europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap. that plan begins but does not end with the monetary policy boldness of the ecb. that plan includes difficult structural reforms, but cannot be wholly reliant on them. that plan requires greater private risk sharing via banking and capital markets unions. but that plan also needs to recognise that private risk sharing will never fully replace public risk sharing so that plan should include what every other successful currency union has at its heart : mechanisms to share fiscal sovereignty. as of this evening, progress on structural reforms in the euro area remains uneven. cross border risk sharing through the financial system has slid backwards. europe ’ s leaders do not currently foresee fiscal union as part of monetary union. 24 such timidity has costs. i think we all know what jim flaherty would have said about that. as president draghi recently noted, “ in other political unions, cohesion is maintained through a strong common identity, but often also through permanent fiscal transfers between richer and poorer regions that even out incomes ex post. in the euro area, such one - way transfers between countries are not foreseen … ” bis central bankers ’ speeches chart 1 : chart 2 : house prices ( a ) rose significantly during the boom years across euro

for example, some empirical work by former deputy governor charlie bean suggests that setting bank rate around 200 basis points higher than it was over the over the period 2003 – 2006 would have reduced the growth in the ratio of household debt to gdp by just 2 percentage points from 2003 – 2007 at a cost of gdp growth over this period being 2. 6 percentage points lower ( bean et al 2010 ). • by contrast, the targeted nature of the tools available to the financial policy committee under the current institutional framework in the uk makes them a natural first line of defence for dealing with build - ups in financial system vulnerability while minimising the knock - on effects to the rest of the economy – as was recognised in the financial stability knockout built into the mpc ’ s forward guidance. these tools can be broken into two groups : – those that are intended to directly affect the build - up of imbalances : for example, the fpc ’ s ability to impose sectoral capital requirements and its power to limit loan - to - value and debt - to - income ratios in the residential housing market. – those intended to improve the resilience of the financial system in the event of shocks and thus reduce the severity of a cyclical downswing, including the power to affect bank balance sheets through a counter - cyclical capital buffer, and a leverage ratio. • the bank ’ s actions in the residential housing market in june 2014 provide an illustration of the benefits of directing targeted macroprudential policy tools at sectoral financial stability risks vis - a - vis raising interest rates. motivated by concerns over the growth of household indebtedness, the fpc recommended that no more than 15 % of mortgages originated could have a loan - to - income ratio above 4. 5. and in response to fears that households on variable rate mortgages could struggle to meet mortgage repayments if interest rates rose significantly in future, the bank recommended a minimum 3 percentage point interest rate stress be applied at origination. so in a first best world where the institutional set up and macroprudential tools are available, i would let them do the leaning first rather than bis central bankers ’ speeches wield the heavy hammer of monetary policy. so far, this is the approach we have taken in the uk. • let me finish with a few words on the development of macro - prudential frameworks across the globe. for the most part good progress has been made in setting up effective macroprudential frameworks at