##d competitiveness. this development showed up in increasingly deteriorating current account positions as well as in bubbles, particularly in the financial and real estate sectors, fuelled by capital flowing from countries with current account surpluses. when the bubbles burst after the global financial crisis of 2007, governments stepped in to support growth and some of them were called to rescue ailing banks. in this way, private indebtedness turned into public indebtedness, with disastrous fiscal consequences even for countries that had run fiscal surpluses prior to the crisis, such as ireland and spain, and even more for those that had not, such as greece. a further shortcoming of the maastricht framework was the inability to deal with what is now being called the “ bank - sovereign nexus ”. when systemically important banks run into trouble, governments are expected to step in and provide fiscal support to contain the spillovers. beyond that, banks are typically the largest holders of government debt from their respective sovereigns. these ties, or nexus, between banks and their governments can lead to a dangerous downward spiral another effect of this downward spiral, under way since the euro area crisis erupted in 2010, is the fragmentation of capital markets. the bank - sovereign nexus has led to a situation whereby cross - border lending of banks has gone down significantly, as banks retreat more and more to their domestic markets, encouraged by their shareholders and, sometimes, by bis central bankers ’ speeches national banking supervisors. the crisis is undermining a key achievement of the euro, the integration of capital markets. a fundamental problem of the maastricht treaty was its over - reliance on the assumption that market discipline and peer pressure would provide sufficient incentives for national policy - makers to conduct sound fiscal and economic policies. this did not prove to be the case. as jacques de larosiere, the former imf managing director, once remarked, what was supposed to be a system of “ peer pressure ” too often turned into a system of “ peer concessions ” or “ peer arrangements ”. on the whole, the maastricht framework proved unable to deal adequately with the high degree of economic and financial integration in the euro area. it was not fully understood that sharing a currency means much more than sharing the same monetary policy. it is a commitment to ensuring sound fiscal, economic and financial conditions. euro area countries largely overlooked the substantial spillover effects that national policy decisions would have on their fellow countries in emu euro area partners. the ongoing crisis

##isation, exchange rate stability, and national monetary policy. one of the three goals had to be abandoned. the choice as to which one became increasingly clear after the failed attempt to secure exchange rate stability through the exchange rate mechanism. 1 given that a single market, including capital account liberalisation, had been a stated goal since the treaty of rome, and given that exchange rate stability was needed to reap the full benefits of the single market, member states agreed to renounce monetary sovereignty. moreover, sharing a currency makes sense for countries with close trade ties. this is especially true for the euro area countries which, since the start of emu, have conducted almost half of their overall trade among themselves. the maastricht treaty, which was signed in 1992, made monetary policy a euro area competence but left economic and fiscal policies under the responsibility of national governments. the concept of economic union relied essentially on the single market, with few binding constraints on economic and fiscal policies. over time, this turned out to be a significant institutional shortcoming. moreover, the transfer of a core sovereign prerogative like monetary policy to the supranational level is a highly political act which entails important political commitments for the future. in particular, the participating countries must undertake to conduct fiscal and economic policies in a way that allows monetary union to work properly. this is a responsibility that the euro area countries share, a responsibility that governments have to fulfil vis - a - vis their peers and vis - a - vis their own citizens. seen from this perspective, it is clear that the concept of emu goes beyond economic and monetary integration. let me add that the single market itself has a political dimension as the proper functioning of markets requires strong institutional underpinnings, such as enforcement of contracts, consumer protection and competition policy. it has mandated the creation of a federal executive ( the european commission ), legislative ( the european in the late 1970s, european countries agreed on closer exchange rate cooperation by setting standard fluctuation bands of plus / minus 2. 25 % for their bilateral exchange rates. this exchange rate mechanism ( erm ) functioned well for a decade or so but it ultimately fell apart due to the divergences in the economic and fiscal policies of the participating countries. speculative attacks ensued and ultimately triggered a crisis that forced two large countries – the united kingdom and italy – to leave the erm in 1992. bis central bankers ’ speeches parliament ), and judiciary ( the eu court of