am convinced that restoring market mechanisms where they have so far been impeded is crucial for strengthening the euro area ’ s institutional framework as well. a constitutive element of any functioning market monti, mario ( 2010 ) : a new strategy for the single market. bis central bankers ’ speeches economy is the principle of liability. or, as walther eucken put it, “ he who profits must also bear the losses. ” when it comes to two of the biggest economic actors in the monetary union, this principle applies only to a limited extent. banks and sovereigns being a priori deemed systemically important, since turbulence on either front threatens the stability of the financial system, would not bode well for the future stability of the monetary union. a framework in which two of the biggest players are at least partially exempt from the disciplining forces of the market would invite future aberrations and lack resilience. if we are to put monetary union on a sounder footing, such vulnerabilities need to be addressed as a matter of urgency. and, as both problems are so closely intertwined, any attempt to tackle one of them in isolation would be likely to fall short of what is required. let me first take a step back and look at why the close link between banks and sovereigns has proved to be so problematic in this crisis. if many banks get into trouble at the same time, possibly because of a large asset bubble bursting, financial stability as a whole is put at risk. the government then often has no option but to step in if it wants to prevent a meltdown of the real economy. but such a rescue rewards excessive risk - taking and can place a huge strain on government finances – which is what happened in ireland, where the need to support the financial system pushed the deficit above 30 % of gdp in 2010. conversely, weak government positions can destabilise banks – directly through their exposure to sovereign bonds, and indirectly through worsening macroeconomic conditions. breaking the link between banks and sovereigns is important for making the euro area more stable. a banking union can be a big step in that direction – but again, we need to harness the disciplinary forces of the market, not do away with them. core elements of a comprehensive banking union therefore have to be not just an effective single supervisory mechanism, but also a comprehensive bail - in of bank creditors, and a cap on exposure to individual sovereign as well as an adequate risk - weighting of

andreas dombret : the importance of being competitive speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the esmt ( european school of management and technology ) open lecture, esmt, berlin, 20 february 2013. * 1. * * introduction dear professor rocholl ladies and gentlemen i am delighted to have the opportunity to speak to you today here at the esmt. at the time, the decision to set up a private business school in an academic landscape dominated by public institutions met with a certain degree of scepticism. in this regard, esmt was no different from most start - ups. but ten years later, the esmt is doing rather well, and that is much less common among start - ups. failure rates are high among young enterprises, but once the initial phase has been survived, a long period of robust health can be expected. optimism is therefore warranted, and not just because the esmt is entering its teens. one of esmt ’ s main fields of study is in european competitiveness. the results of this research will hardly suffer from a lack of attention. it is now widely agreed upon that persistent gaps in competitiveness were one of the root causes of the current crisis. recognising that fact certainly constitutes progress. nevertheless, although a consensus appears to have emerged concerning how the crisis developed, views still differ on how it should be resolved. that might seem somewhat paradoxical at first. if there really is a consensus that restoring competitiveness is key to overcoming the crisis, how is it that prescriptions for remedying the euro area ’ s woes differ so starkly? in my remarks, i wish to argue that such differences of opinion have their origin largely in a constant tug - of - war between two competing economic objectives : efficiency, in particular motivated by the proper incentives, on the one hand, and distributional issues, on the other. or, to put it more bluntly, one line of argument has to do with how emu ’ s growth engine should be fixed and how it should be made to run more reliably, while the other line of argument is more about who is going to foot the bill – for past and future burdens alike. i do not want to disregard concerns about the scale of such burdens or the social and political costs of bearing them. rather, based on a diagnosis of how the crisis came about, i would like to stress that