facility, the european stability mechanism ( esm ). the esm builds on the ad hoc stability facilities established in 2010 to arrest contagion and thereby preserve overall financial stability in the euro area. by providing bridge funding, it will create breathing space for euro area countries in financial difficulties to implement a deep adjustment programme, correct imbalances and regain market access. in spite of some shortcomings stemming from the rigidity of its instruments, the creation of the esm is of enormous importance. the way ahead these measures – although at varying stages of development – represent an important step forward towards remedying the problems of economic governance in the euro area. whilst necessary and important, they will have to be further reinforced, recognising that what may be sufficient for the 27 member states is not enough for the euro area. the reform of governance of the euro area should not be hampered by the need to decide anything according to the least common denominator among the 27 members of the eu. the decision of 17 countries to share a common currency has far reaching consequences and requirements that should be fully recognised. the euro area is a highly integrated economic and financial area which needs to be managed through common decisions. however, aside from monetary policy, it lacks powerful decision - making institutions. this means that rule - based frameworks must act a substitute for centralised authority. for fiscal and economic issues, a unitary state would have a finance ministry which both defines and vetoes fiscal and broader economic policies. emu must achieve the same effect through its economic governance framework. the recognition of this requirement was certainly behind the recent proposal presented by president trichet for the creation of a european finance ministry. we know from the crisis, and from learning - by - doing, that soft rules will not achieve the desired outcome. they allow for multiple equilibria – some of which are sub - optimal for all parties. strengthening the rules governing fiscal and broader macroeconomic policies is essential to guarantee equilibria that are mutually beneficial. the legislative package on economic governance i described above is now being negotiated between the commission, the council and the european parliament, with the goal of strengthening the rules for surveillance of fiscal and broader macroeconomic policies. in the ecb ’ s view, the council position is insufficient and needs improvement in a number of areas. greater automaticity is needed in preventing and correcting national economic policies that stray from a sustainable path. political discretion should be limited when unsustainable bis central

try. strengthening economic governance is essential to create sustainable growth and job creation in the future, whilst preserving the national diversity that makes europe unique. it is fundamental to the success of a union with a centralised monetary policy and decentralised economic policies, which is not a political union. it is important to see the challenges currently facing europe in this broader context – and take the actions that are commensurate with it. bis central bankers ’ speeches