. the second example refers to the recent bout of global financial market volatility. the period served as a useful initial stress test for vulnerabilities in certain global market segments. again, bond and equity markets in stressed euro area countries have been remarkably resilient to the heightened global risk aversion. capital outflows were modest and the increase in yields marginal. by contrast, several emerging market economies experienced significant disruptions and were subject to pronounced portfolio retrenchment by global investors. investors seem to increasingly differentiate between securities of stressed euro bis central bankers ’ speeches area countries on the one hand and other riskier market segments on the other hand, which have been subject to capital outflows amid elevated levels of risk aversion. taken together, the return of foreign investors, receding financial market fragmentation and a halting of contagion clearly demonstrate a return to confidence in the euro, and the credibility of the measures taken at supra - national and national level. let me now conclude. the euro area crisis has painfully shown that the original design of the monetary union was incomplete. an overhaul of the emu architecture was necessary and a lot of progress has been made over recent years to strengthen emu, both at national and at supranational level. and we are now seeing encouraging signs. recent financial market developments clearly demonstrate the credibility of the reform measures taken at european and national level – although progress is unevenly distributed. investor confidence is returning, the persistent euro area financial market fragmentation is decreasing and contagion is receding. however, the policy agenda needs to be completed. investment has taken a disproportionate share in the adjustment process and must be freed. financing the real economy via the banking channel should resume with the certainty and confidence accompanying the banking union ’ s comprehensive assessment. capital markets reform needs to be backed properly by regulation. indeed, as churchill famously said : continuous effort is the key to unlocking our potential. bis central bankers ’ speeches

to deal with ( domestic and cross - border ) systemic risks in the banking sector. to be true, in the late 80s / early 90s the concept of systemic risk hardly existed. the flaws of the original treaty are therefore less of a conceptual nature – unless one applies the intellectual framework of today with the benefit of hindsight to judge the design of the early 90s. the main flaw in my view was that the political authorities and economic agents did not internalise enough what participation in a monetary union means. they received the benefits of reduced interest rates but missed out on the obligations for the country itself ( i. e. the need for adjustment through the domestic economy ) and towards other countries ( arising from negative spillovers linked to unbalanced domestic policies ). a coherent and viable architecture of emu ought to be based on more integrated frameworks for budgetary matters, economic policy, financial sector and democratic accountability. bis central bankers ’ speeches in light of the crisis and the urgent responses it required in the short term, one may lose sight of the major institutional progress achieved since the crisis erupted. besides putting in place crisis management tools and financial firewalls that not only proved effective but also underlined a degree of solidarity unseen before to accompany ambitious reform programs which began – where implemented – to yield results, european leaders have adopted major decisions aimed at significantly reinforcing the architecture of emu. first, the fiscal framework has been strengthened since the start of the crisis to improve fiscal discipline and restore fiscal sustainability in euro area member states. in particular, fiscal surveillance has been enlarged and fiscal governance has been enhanced by procedural steps to nearly automatic sanctions. we expect that no further holes will be punctured in this strengthened sgp. there are encouraging signs. national governments are addressing their fiscal imbalances. the euro area ’ s progress in fiscal consolidation is much more advanced than that of other regions of the world. its average fiscal deficit in 2013 is projected to be 3. 1 % of gdp, compared with a 5. 8 % deficit in the us or a 9. 5 % deficit in japan. gross general government debt is expected to peak at 96 % of gdp in the euro area this year vs. 106 % in the us and 244 % in japan. second, economic governance at european level has been improved by implementing the macroeconomic imbalance procedure ( mip ). the mip has been set up to enhance surveillance, identify potential risks and correct existing imbalances. this has been complement