avoid gross fiscal policy errors, through peer monitoring and peer pressure, as well as through the threat of sanctions. however, implementation of the pact was rather weak in emu ’ s early years. tensions emerged already in the early 2000s, and in november 2003, when action should have been bis central bankers ’ speeches taken against both france and germany, the ecofin council decided not to act, overruling the european commission. this unwillingness to apply the rules was a “ mortal sin ” : a clear message was sent to the other euro area members that the pact was not there to “ bite ”. more generally, i would say that weak economic governance in the euro area had three major consequences : first, inadequate domestic fiscal policies were tolerated, leading to unsustainable fiscal positions in some countries and tensions in the conduct of the single monetary policy ; second, insufficient attention was devoted to losses of competitiveness and the accumulation of current account imbalances within the euro area ; third, and probably most important, the correlation between the ability of the financial sector and of the sovereign states to obtain financing was largely ignored. on the one hand, the market for funding was highly integrated within the euro area ( i. e., the money market and the sovereign debt market ) ; on the other hand, banking ownership and lending continued to be essentially domestic - based. the fact that the banking system and the sovereign states shared the same frontier meant that their ability to borrow depended on the same set of fundamentals. this inter - dependence turned out to be a major source of macro - systemic risk in the euro area. the sovereign debt crisis has brought to the forefront the failures in emu economic governance, and has exposed the particular vulnerability of euro area member states to changes in markets ’ sovereign risk perception. indeed, when a country has its own free - floating currency, a loss in market confidence translates into a bond sell - off, which in turn leads to higher yields and exchange rate depreciation, leaving ( all else equal ) money supply, and the supply of credit to the private sector broadly unaffected. also, the national central bank acts as a lender of last resort. therefore, investors cannot precipitate a liquidity crisis that could force the country to enter into default. in contrast, for a country belonging to monetary union, a loss of confidence and the resulting bond sell - off imply not only higher yields, but a shortage of liquidity, which can easily turn into solvency

##erabilities in the financial system and provide a mechanism to address them preemptively. bis central bankers ’ speeches over the last 4 years, banco de portugal has relied in stress - tests and fcp to monitor the 8 most significant portuguese banking groups. these tools provide us with an assessment of banks ’ financial projections and a framework to check whether these aggregated projections are consistent with a baseline scenario and can sustain adverse macroeconomic conditions. for example, fcp provide us with information on bank ’ s business models and on their projections concerning credit, deposits and other relevant variables. when aggregated, these projections can be assessed against overall macroeconomic scenarios allowing us to evaluate : whether total credit projections are consistent with the financing needs of the real economy ; whether credit is concentrated on more vulnerable over - priced sectors ; whether projected deposits are compatible with the expected evolution of labour market conditions and households savings. both fcp and stress - tests can be more forward - looking than other policy instruments in the sense that the imposition of capital requirements would not depend on the analysis of the past situation but on a forward looking assessment of scenarios that would occur under normal or adverse conditions. they could also be a useful to identify correlated exposures, as institutions would be facing the same type of stress. policy framework and governance in spite of the difficulty in detecting financial systemic risk, the absence of policy intervention prior to the crisis cannot solely be attributed to this. in fact, episodes of high credit growth, excessive securitisation, and macroeconomic imbalances resulting from over - indebtedness were easily observable in many countries. however, their potential systemic impact was largely overlooked in the years preceding the financial crisis. this situation led to the recognition that, in addition to methods to detect and mitigate risks, a profound reform in the financial regulatory framework and governance was needed in order to ensure timely and appropriate policies. alienor margerit gave us an excellent presentation of the extensive reforms that the eu framework for macro - prudential policy underwent over the latest years. it is clear from her presentation, as well as from fernando restoy ’ remarks, that the eu regulatory framework is very specific given the needed inter - action of different countries in the context of a monetary union and a banking union. even though the competence for macro - prudential policy remains in the national authority, several mechanisms were put in place to ensure the coordination among different national authorities, allowing them to address cross - border issues. this need