heighten this confidence. however, as with any insurance policy, one would have to make sure in this case, too, that the insurance does not cover losses which have already occurred, like bad loans already on banks ’ books, and that the insurance does not encourage careless behaviour in the future. unlike banks in the united states, banks in the euro area have a sizable share of sovereign bonds on their books. to insure euro - area bank risks in such a situation would be tantamount to insuring fiscal risks. given that the member states themselves still decide freely and independently on the level of government expenditure and taxes, this ultimately sets the wrong incentives : finance ministers would see less of a need to pay adequate attention to the sustainability of public finances. one precondition for a european deposit insurance scheme, then, is that the size of government bond portfolios that banks hold on their books is limited. doing away with concentration risks of sovereign bonds in banks would be a boon to monetary policy as well. during the crisis, monetary policy transmission was hampered by these large and undiversified sovereign bond portfolios. potential losses on these portfolios were draining banks ’ equity buffers. the banks in question were therefore unwilling to lend and to pass on the low policy rates to companies and households. 56 in order to shield an economy from a sovereign in trouble, banks must be restrained in taking on government debt. 5 conclusion ladies and gentlemen alfred nobel never envisioned a nobel prize for economics. on the contrary, he once wrote in a letter that he did not have an economic education, and that he hated it with all his heart. no wonder economics is dubbed the “ dismal science ”. obviously, i do not share nobel ’ s sentiment. on the contrary, i am firmly convinced that a social science that is based on transparent assumptions and is thoroughly steeped in data is of immense benefit to all of us. but i am equally convinced that a conference like today ’ s, that sets out to discern similarities and differences, would have met with approval, even in the eyes of alfred nobel. thank you for your attention. 1 auer r, c borio and a filardo ( 2017 ), “ the globalisation of inflation : the growing importance of global value chains ”, bis working papers 602, bank for international settlements. 2 allard, c, p k brooks, j c bluedorn, f bornhorst, k christopherson, f ohnsor

the greater the heterogeneity, the less well it will fit the respective member states. this reduces overall economic welfare. how, then, might heterogeneity be lowered? macro - prudential policies are one option. they can be deployed against regional and sectoral pockets of exuberance, in case they are suspected to pose a systemic risk. possible instruments include higher risk weights for certain asset classes, or loan - to - value ratios that raise equity requirements for a mortgage. some euro - area countries have indeed taken macroprudential measures to counter a strong increase in mortgage loans fuelling the ongoing rise in housing prices. and preventing certain sectors or regions from running hot will help to reduce overall economic volatility as well. first and foremost, however, national economic and fiscal policies need to be tailored adequately to ensure that economic developments do not diverge too much. countries experiencing a cyclical boom should run a tighter fiscal policy, and countries experiencing a slump should loosen it. but for this to happen, countries need the requisite fiscal space. this is why it ’ s 4 / 7 bis central bankers'speeches imperative to adhere to the fiscal rules over the cycle. structurally, flexible labour markets are another prerequisite of a well - functioning monetary union. the higher the labour mobility within and across member states, the better fit a common monetary policy will be. robert mundell was awarded the nobel prize for this insight, aptly enough on the occasion of the launch of european monetary union in 1999. his first theory of optimum currency areas emphasised the necessity of capital and labour mobility. economists like peter kenen later expanded on his work. in particular, they stressed the importance of risk sharing via fiscal and other means for a currency to work smoothly. and it is here, in my opinion, that the differences between the united states and the euro area are instructive as well. in the united states, shocks are spread through the distribution of business profits and losses throughout the currency area, because company owners are often residents in other states. another channel of private economic risk sharing is through saving and lending. enterprises and households take out loans in different us states during an economic downturn to bridge a slump in earnings. risk sharing through fiscal policy takes a back seat by comparison. only 10 % to 25 % of risks are shared by a common fiscal policy in federations like the us or canada. 2 it is private means of risk sharing that bring the