embedded in these products. 2. better – that is, more effective – regulation will ensure that no financial product and no financial market participant can escape the eyes of supervising authorities. many financial players with high leverage have gone unchecked by our regulatory system. better regulation will expose the risks inherent in the financial system and make the system more stable. needless to say, highly leveraged institutions should be part and parcel of this process. 3. less pro - cyclicality of the financial system will reduce market volatility. regulation should attempt to limit the risks that banks assume by imposing higher, countercyclical capital requirements, thus limiting leverage. financial institutions will be asked to raise the quality and quantity of their capital base to ensure they have adequate buffers against future market disruptions. 4. less short termism : the promise of significant returns in the short term was often linked to a misjudgement of underlying risk. at the level of individual institutions, compensation schemes must be adjusted to avoid encouraging excessive risktaking on the basis of relatively small amounts of capital. instead, the incentive structure should encourage profitability over the medium to longer term. at the same time, on wednesday, the european parliament approved significant curbs on bank bonuses as part of wider efforts to reform the financial sector. eu finance ministers are set to endorse the law next tuesday with the curbs taking effect from the start of next year. at the level of the financial system as a whole, we need to improve decisively the prevention of build - up of risks, including systemic risk. macroprudential oversight will help to prevent the building up of imbalances. the third area of work concerns fiscal consolidation. this affects all industrial economies. governments must send a clear message to markets – a message of determination and commitment to sound macroeconomic policies. there is no doubt that bold government actions including large capital injections in support of the financial sector helped to cushion the impact of the financial crisis. these measures were courageous and important in avoiding an even worse economic downturn. but many countries in the industrial world have reached the limits of fiscal expansion. rising debt levels and large fiscal deficits have raised concerns among financial market participants about the longer - term sustainability of public finances. just like consumers and countries, governments cannot live beyond their means forever. fiscal authorities need to look beyond the current cyclical upturn. there is no alternative to that. let me remind you of an often forgotten remark by john maynard keynes

from 1937, in the aftermath of the great depression, when he said : “ just as it was advisable for the government to incur debt during the slump, so for the same reasons it is now advisable that they should incline to the opposite policy ”. 1 fiscal consolidation and growth are not mutually exclusive. i disagree with the view that reducing public expenditures will hinder economic growth. on the contrary, prudent fiscal management provides the basis for balanced and sustainable growth. stability - orientated fiscal policies will foster confidence among households, entrepreneurs and investors, which will ultimately increase our welfare by creating new jobs. 2. how should we address european modalities of today ’ s global challenges? i have outlined three key areas for efforts to shape the contours of the post - crisis world – reform of the institutions of global governance, reform of the financial system and reform of public finances. these are global challenges affecting in particular the industrial economies. i would now like to explain how europe specifically is responding to these challenges. an ambitious agenda lies before the continent. it is not only a visionary agenda : it has to be pursued with determination right now. we have to demonstrate the same spirit with which the european union was progressively developed over the past half - century : setting objectives, agreeing deadlines and mobilising the necessary political will within parliaments. europe ’ s governments are committed to pursue fiscal consolidation. those within the euro area have formally declared that they will take “ all measures needed to meet fiscal targets this year and the years ahead in line with excessive deficit procedures ” ( euro area heads of state or government declaration of 7 may 2010 ). some of them have made precise additional commitments to accelerate fiscal consolidation and ensure the sustainability of their public finances. fiscal consolidation is being put in place at the same time as we strengthen the resilience of the european banking sector. publication of the detailed results of a harmonised paneuropean stress test is an important step in the right direction. these tests will increase transparency and enhance investors ’ confidence in europe ’ s banking sector. they will also contribute to restoring the important intermediation role of the interbank market in channelling funds within europe. 3. where next? so where do we go from here? as i have indicated, collectively as european and global policy - makers, we need to ensure economic recovery and renewed confidence, while reducing fiscal deficits and remaking the financial system into one that supports the real economy. this