system. attaining this twofold objective would allow the benefits of integration to be reaped, while managing the associated spillover risks. more “ e ” in emu the financial and economic crisis over the last three years has exposed the main supervisory and regulatory failures both at national and global levels. in europe, it has also revealed how financial integration has increased the likelihood, scope and pace of contagion across the european financial sector. the institutional framework for managing the euro area economy and financial system has proved to be inadequate. to be more specific, the monetary part of emu has worked well. price stability – the primary objective of the single monetary policy – has been maintained, before, during and after the crisis. but the economic dimension has been insufficient. as i just said, we need more “ e ” in emu, with a view to creating an economic area that is more closely, deeply and irreversibly integrated. bis central bankers ’ speeches the origins of the recent economic crisis lay largely in the financial sector. a more resilient financial sector is key to building a euro area framework that will be more robust and effective in facing future shocks. deepening and broadening financial integration in europe is an essential – although neglected – component of the economic dimension of economic and monetary union. stronger integration will not only ensure a more efficient allocation of resources across the eu, but also enhance the shock - absorbing capacity of the financial system and the economy as a whole, thanks to increased opportunities for risk - sharing, and improved market and funding liquidity. research using data from the united states has demonstrated the important role played by financial markets and capital flows in absorbing the impact of idiosyncratic regional shocks. 1 the risk - sharing across regions resulting from an integrated financial system in the us has a far greater smoothing effect on regional consumption patterns than that achieved via explicit fiscal transfers through the federal government ’ s budget. this shows that it is an integrated financial sector, rather than the federal budget, which plays the most important role in ensuring that regional disturbances do not disrupt the functioning of the american economy as a whole. research undertaken by ecb staff confirms that greater banking integration within the eu has increased consumption risk - sharing. 2 but there is clearly some way to go before the level of integration – and thus the extent of risk - sharing – seen in the united states is achieved. these results have important implications for the current debate on further european integration. there is a lot of talk about the

average between 1990 and 1998, respectively ), cost and price pressures remained contained in ireland ( 1. 4 % and 2. 3 %, respectively ). competitiveness was hurt in portugal, resulting in a rising current account deficit ( to 8. 9 % of gdp in 1999 ), while competitiveness was relatively well preserved in ireland and the current account position broadly neutral ( 0. 3 % of gdp in 1999 ). thus, the longer - term track record before joining monetary union regarding low inflationary pressures and a balanced current account was impressive in ireland. this shows that even very rapid catching - up does not need to be associated with high inflation or large imbalances. after the euro changeover – between 2000 and 2003 – a sharp downward adjustment occurred in portugal as consumption and investment slowed considerably. competitiveness problems and the need to improve the fiscal position added to the downturn. annual real gdp growth in portugal in the period 1999 – 2006 averaged 1. 7 %. in ireland, real output growth continued instead at a strong pace ( at 6. 5 % on average ) in this period and the fiscal balance was in slight surplus. following the slowdown in activity, ulc growth and inflation pressures diminished in portugal ( to 3. 1 % and 3. 0 % on average, respectively ), while they gradually picked up in ireland ( 3. 2 % and 3. 5 %, respectively, on average ) in the period 1999 – 2006. since 1999, the portuguese economy has not succeeded in improving its competitiveness and its sizeable current account deficit remains. in principle, one could imagine that stronger productivity growth should contribute to containing unit labour costs, making ireland more competitive than portugal. this is true, but not in the most obvious sense. if one computes unit labour costs in ireland and portugal, in part, this might reflect the fact that the statistical data for real g dp are different from real g np in the irish case. therefore, the increase in real domestic product has not necessarily entirely benefited the irish people to the same extent. however, the quantitative importance of this discrepancy is low. we are therefore left with the task of understanding the causes of this divergence in economic performance. numbers are approximately the same. however, export performance has been much stronger in ireland than in portugal, which has resulted in a trade surplus in the balance of payments ( against a large deficit in portugal ). the large profit outflows in the factor income account in ireland negatively