euro in another. the only way to achieve this is to remove the differences in the banking system that can create fragmentation along national lines – and the most important difference is the way banks are supervised and, when necessary, resolved by national authorities. we are thus moving these functions to the european level to ensure that the single currency is matched by a single banking system. and this is consistent with the positive definition of sovereignty i gave earlier : a genuine banking union can give citizens more trust in their money than can different national approaches. moreover, there is an important positive feedback effect here. while there is a chain of logic from the single market to the single currency to banking union, banking union in turn see, among others, p. lane ( 2006 ) : “ the real effects of emu ”, cepr discussion paper no. 5536. the paper states that “ emu has indeed contributed to greater economic integration – however, economic linkages with the rest of the world have also been growing strongly, such that the relative importance of intra - emu trade has not dramatically increased ”. bis central bankers ’ speeches supports the single market. when fragmentation of the banking system takes place, it does not only undermine the singleness of money, but it also undermines the conditions of competition. this is because it results in a dispersion of bank lending rates among national lines, as we have seen in recent years. let me be clear here : there is no reason per se why a spanish firm should be able to borrow at exactly the same price as a dutch firm. if the operating environment of both firms is different, then this can reasonably affect their credit risk and therefore the rate at which they borrow. but in a single market, a spanish firm should be able to borrow from a spanish bank at the same price at which it would borrow from a dutch bank. if that is not the case, if the risk premium paid by a bank client in one country is not idiosyncratic but systemic, then there no longer truly is a single market for capital. location would matter. and this is what banking union aims to reverse. in europe, such banking union is even more important than in the us because over two thirds of firms ’ external financing takes place in the form of bank loans. for small and medium - sized enterprises this share is even higher. in the us, by contrast, the role of banks in firms ’ external finance is only about one - third or even less. hence,

. bis central bankers ’ speeches these steps include new ways of dealing with countries that do not comply with recommendations from the european commission. they include giving the commission the right to inspect national budgets before they go before national parliaments – a power the us federal government does not have over the states. and they include inserting balanced budget rules into their national constitutions or equivalent. we look forward to a full and transparent implementation of this new regime. these changes do to some extent represent a transfer of powers to the european level. but as with banking union, i do not view it as a loss of sovereignty. rather, i see the strengthening of the fiscal pillar in a manner that lends credibility to fiscal policies as a way to restore the efficacy of policy : for the union as a whole, as countries are less affected by spillovers from fiscal difficulties in an integrated financial market ; and also for the member states themselves. this budget stabilisation capacity through the automatic stabilisers is diminished if governments are unable to run a deficit at the low point of the cycle – or put differently, if the credit of the government deteriorates to the point where its debt is no longer regarded as a safe asset. indeed, if the credit of the government is impaired, and behaves like private credit, then government ’ s relative cost of borrowing increases at precisely the time when it needs to borrow. one can see this as the real loss of sovereignty. it prevents national governments from using normal fiscal policy for macroeconomic stabilisation. in this sense, steps that restore faith in public credit, such as more credible fiscal rules, restore the ability of governments to exercise the functions that citizens expect from them. this is particularly important in a monetary union where the burden of macroeconomic stabilisation cannot be entirely shifted onto the shoulders of the central bank. our monetary policy mandate is to deliver medium - term price stability in the euro area as a whole. fiscal policy has to absorb idiosyncratic or asymmetric shocks at a national level. and unlike in the united states, as fiscal policies are decentralised, such stabilisation takes place entirely at the sub - federal ( or national ) level in the euro area. however, if the fiscal rules and institutions are credible, there is ample scope for national policies to perform this role. looking forward overall, the changes taking place in the euro area are making our monetary union more robust. at the national level, consolidation and structural reforms are helping most countries