no guarantee of continued operation for – say – individual banks in a market economy. that is why steps must also be taken to ensure that at least the vicious circle of weak banks dragging down weak sovereigns and vice - versa is broken. this principle of two lines of defence is not new. it has been the basis of the reform of financial market regulation thus far. coming back to the specific question we are looking at, a banking union should therefore ensure that fewer crises arise within the banking system that could potentially overburden the public finances of the member states directly affected, and subsequently cause problems for the rest of the euro area and for the single monetary policy. a banking union should also guarantee that monetary union is better equipped to deal with crises that cannot be prevented. in keeping with these two lines of defence, debate currently centres on two components of a european banking union : common banking supervision and a common restructuring and resolution mechanism for banks. a third component under discussion is a common deposit protection scheme. however, that has slipped out of the spotlight somewhat – and i would say, rightly so. let us start with common supervision and the advantages it offers. i consider four of them to be especially important : • first, common supervision increases the transparency of national banking systems. and in particular, more transparency means less uncertainty about the possibility of hidden risks. • second, common supervision is likely to make national banking systems less likely to become swept up in the fiscal problems of their respective domestic governments. this is because it is easier for a supranational supervisory authority than national supervisors to intervene when domestic banks are co - opted to provide overly cheap loans to the government or to households. • third, common supervision ensures that the same high standards are applied everywhere and, therefore, that competitive conditions, too, are the same. the bis central bankers ’ speeches concentration of excessive risks in banks ’ balance sheets, the emergence of hypertrophic banking systems and the financial crisis as a whole were aided and abetted, amongst other things, by differences between individual countries regarding the strictness of their prudential supervisory regimes. • and fourth, common banking supervision also facilitates measures to deal with cross - border systemic effects. this, too, would have gone a considerable way towards preventing the current crisis, and would have helped to deal with it more effectively. to sum up : common supervision could make the banking system more resilient and crises less likely. this would take considerable strain off both the public finances of

costs which in the first quarter of this year rose higher than productivity growth. this could be a sign of possible wage - price inflation. intuitive as it may seem, the cake eating analogy as well as several simple analogies you may have heard from our critics is not the whole story. what is missing in them is the reference to inflation expectations. our critics seem to have completely disregarded the important and long - lasting role of inflation expectations. strangely, concerns on inflation expectations, which feature prominently in the public discussion in other countries, seem to be relatively absent in this country. with your help, we can raise the level of public discussion about the forces underlying inflation here. again, central banks may be accused of being concerned on issues like inflation expectations that seem more academic than real. on this, i wish to emphasize that a valuable lesson from the previous two oil shocks thirty years ago is the role of inflation expectations in inflation developments. it is now well established that, independent of demand and supply shocks, an increase in the public ’ s long - term inflation expectations leads to higher inflation and lower output. failure to keep inflation expectations in check will lead to persistent increases in the price level well after supply shocks vanishes. this is why modern central banks pay so much attention to ensure that inflation expectations do not run away. in general, how well a central bank can anchor the public ’ s inflation expectations will depend on the extent in which the public perceived the central bank ’ s seriousness in fighting inflation. such credibility hinges critically on the central banks ’ actions and what the public expect it to do. words like “ behind the curve ” are often used to describe central banks that move too slowly to curb public ’ s inflation expectations. central bank, unlike the government which has a fixed term, has a greater incentive to care for economic stability. while the government tends to be more myopic in their policies, central bank is mandated to optimize the benefits across horizon. history has taught us that a popular central bank is not always the most credible central bank. a pro - growth central bank is prone to inflationary bias which undermines its credibility in fighting inflation. disinflation would then become more costly. inflation targeting is one framework to discipline the central bank by paying attention to price stability. it has been working very well for us and for many other countries in the world that have adopted the regime. but the challenge today is to find the right sacrifice ratio between economic growth and inflation. in addition