or exuberant house price increases. in addition, a new idea of “ reform contracts ” will be explored further next year, by which member states would commit to specific measures to boost competitiveness and receive targeted financial support from the euro area in return. c. towards a banking union however, the most significant governance development has been the commitment to create a real banking union in the euro area – to resolve the “ financial trilemma ” i referred to at the beginning of my remarks. its first component is the elevation of supervisory responsibilities to the european level. bis central bankers ’ speeches in mid - december last year, the finance ministers of the eu member states unanimously reached an agreement on the legislative framework for a single supervisory mechanism ( ssm ) through the attribution of banking supervision tasks to the ecb. this legislative framework is expected to be enacted in the course of the first quarter of this year. the agreement on the ssm is a milestone in european integration, with no precedent in monetary union historical experiences. member states have agreed to assign to the european level a full and complete set of banking supervision powers over all banks of the euro area member states and also over the banks of the eu countries wishing to join the ssm. the supervisory powers range from authorisation, pillar 1 and pillar 2 tasks to early intervention and sanctioning powers. furthermore, the ssm will also have responsibilities regarding macro - prudential supervision of the euro area financial system as a whole also of individual countries, which is a necessary complement for both central banking and banking supervisory policy, as the crisis has taught us. the establishment of the ssm is essential for the functioning of monetary union. the independent supranational supervision by the ssm will help to restore confidence in the banking sector. this should reverse the trend towards financial fragmentation, prevent flows of deposits due to the lack of confidence, and help restart a well - functioning interbank market. it is also a major step for the single financial market. the ssm will simplify supervision and support the development of a single rulebook by the european banking authority, while helping to better address systemic risks in europe. the single supervisory mechanism, although very important, is only the first step towards a banking union. the next step is the establishment of a single resolution mechanism – a necessary complement to the ssm. building on a strong legislative framework on bank recovery and resolution ( which is under preparation ) such a single resolution mechanism, with a single resolution

vitor constancio : the global financial crisis – 5 years on intervention by mr vitor constancio, vice - president of the european central bank, at the china - europe economists symposium, beijing, 12 january 2013. * * * ladies and gentleman, first of all, let me extend my thanks to david marsh and omfif for inviting me to this symposium today. there are many themes on the relationship between china and europe that we could fruitfully discuss but i would like to focus my remarks today on the euro area and the evolution of the sovereign debt crisis. in particular, i would like to review the key lessons from the experience of the last 5 years – and how these lessons have been incorporated into europe ’ s response to the crisis. 1. lessons of the crisis let me begin with that first question : what have we learned about the euro area in the past 5 years? in my view, there are three main lessons. first, the financial crisis demonstrated – quite compellingly – that financial contagion is the flip side of european financial market integration. we have learned that deep financial integration, without a commensurate deeper integration of financial stability policies is unstable. this potential vulnerability has been characterized by dirk schoenmaker as a “ financial trilemma ” : the three objectives of european financial integration, european financial stability and national supervision of banks cannot be achieved at the same time. the existence of this trilemma was confirmed in the euro area experience. indeed, as it happened, enormous capital inflows channelled by banks of core countries to banks in the periphery allowed for large financial imbalances in the public and private sectors of recipient countries. when these flows turned into outflows as the economic environment deteriorated after 2008, these imbalances not only led to problems for the countries concerned but also produced contagion to other parts of the euro area. financial stability – we have seen – is a common good and as such requires shared responsibility for its preservation. a single mechanism for financial supervision and a common authority with strong tools for bank resolution – could have more easily dealt with the situation. second, we have learned that shock absorbers at the national level are insufficient in the face of a major financial and economic crisis. hence the european level has an important role to play. the design of the euro area assumed that stabilisation would take place at the national level and to a large extent automatically. stabilisation would be provided by national fiscal