stronger base for long - term growth. the positive side of this risk is that it would accelerate new zealand ’ s much discussed rebalancing, reducing the current account deficit, improving competitiveness, reducing bis central bankers ’ speeches exchange rate pressure, relieving pressure on funding markets, and reducing our external vulnerability generally. the negative side is that new zealanders would have to reduce their consumption compared with pre - gfc years, and that could create an emigration exodus. 2. financial market fragility another negative scenario would be if financial markets, scarred by european debt, were to become more allergic to indebted small countries generally. in that situation local banks could find their funding markets increasingly fragile, and with an overly cautious eye on basel iii, and more interesting expansion opportunities elsewhere, the cost and availability of credit would tighten for new zealand business. this would limit business re - investment and mean some businesses might hit capacity bottlenecks later in the year when demand starts to recover. in addition, funding market fragility would be bad news for our public debt. if participants in fragile sovereign funding markets were to form a view that new zealand exposure is less attractive, credit rating agencies might re - assess new zealand sovereign debt, meaning that debt servicing costs could rise. if the market were to form the view that the government deficit was increasingly structural and hard to correct, and if the new zealand government were forced to consolidate faster, this could generate a contractionary effect on consumption, which would be difficult to counter with monetary policy. and in such an environment, looser fiscal policy would not be a serious option. 3. construction boom while we have outlined a number of negative risks to the business environment, one that could be more positive would be a large pick - up in construction this year. there are two obvious drivers. firstly the canterbury earthquake : our estimates suggest that the $ 5 billion rebuild added to nominal gdp comprises about $ 1 billion of damage to infrastructure and about $ 1 billion to commercial buildings, with the remaining $ 3 billion comprising residential claims. in itself this is very big by new zealand standards, indicated by the fact that it will add one percentage point to growth each of the next two years. however, these estimates are uncertain and damages from ongoing aftershocks, suggest the extent of the ultimate rebuild could be significantly larger. in addition the relatively strong inward migration, the limited investment during the last few years, growing demand in the auckland region, and leaky homes recti

remains a vital shock absorber at the national level and that, therefore, it may be necessary to increase, rather than reduce, flexibility in the conduct of fiscal policy. given that the objective of a common fiscal policy and a common treasury remains politically unrealisable, one needs to explore other interim solutions which, without creating risks of moral hazard, introduce an element of solidarity between emu members that go beyond bail - outs and austerity. in the end there can be no longevity in a monetary union where members are moving at very different economic tempos and sometimes even in different directions. another aspect of emu governance is strengthening the economic part of emu. this requires structural reforms aimed at enhancing potential growth, reducing structural unemployment and increasing national economies ’ resistance to shocks. while many euro area countries undertook a wave of reforms during the crisis, today, across much of the area reforms have stalled. this is not a uniform picture. malta is enjoying robust economic growth despite regional headwinds, largely as a result of reforms implemented in recent years that stimulated the development of new areas of economic activity and increased labour participation. malta has also taken full advantage of its membership of the eu and its adoption of the single currency. resilience to shocks can also be built up through deeper economic integration. indeed, as the five presidents ’ report argues, financial integration helps to share risk across emu member countries. the completion of a banking union, which will strengthen the european banking sector, is a key objective in this regard. in this area, success so far has been partial. the single supervisory mechanism involving the ecb via the supervisory board and the national supervisory authorities is up and running, following a comprehensive health check of the euro area banks. the single resolution mechanism is also operational and is being funded according to plan. as regards the third pillar of banking union, the european deposit insurance scheme ( edis ), negotiations are still under way. we believe that edis is will increase confidence in banks across the euro area. in sum, we are still far from completing the steps envisaged in the first phase of the five presidents ’ roadmap. achieving and maintaining responsible fiscal policies at national and euro area level still seems beyond our grasp and while certain elements of the banking union are now in place, more needs to be done. overall, the timetable is ambitious. we must also be realistic and admit that further integration is running against headwinds of popular discontent with integration and liberalisation.