made considerable progress. and importantly, the governance reforms that have been agreed are much more internally consistent. they come close to the two ideal forms that i mentioned earlier : in some areas there will be centralisation and discretion ; in others decentralisation and no discretion. from november this year banking supervision will be centralised in the single supervisory mechanism ( ssm ). bank resolution will also be centralised in the single resolution mechanism ( srm ). the latter is particularly important as the legal framework it will bis central bankers ’ speeches implement – the bank recovery and resolution directive ( brrd ) – contains quite some discretionary exemptions, in particular from the new bail - in provisions. for deposit guarantee, there is no centralisation yet. but under the recently adopted directive national schemes will have to meet the same minimum standards for levels and funding, meaning that there is also little discretion. implementation, therefore, will be key. fiscal union banking union will certainly help reduce the impact of sovereign risk on the banking system. but still, there is little that can be done if sovereigns pursue manifestly unsound fiscal policies. domestic banks remain heavily exposed to their sovereigns. and any regulatory initiatives to address this issue – e. g. large exposure limits or doing away with the risk - free treatment of sovereign debt – can only be introduced very gradually in order to avoid market turmoil, and most likely only in the context of other governance reforms. thus, to be consistent, a single banking system and a single currency require a fiscal framework that guarantees budgetary solidity. the euro area has done a lot since the start of the crisis to strengthen fiscal rules. in particular, member states have sought to move away from the unstable middle ground of the first sgp by anchoring fiscal rules more firmly in national law. the fiscal compact – which requires countries to run balanced budgets over the cycle and reduce their debt levels progressively towards 60 % of gdp – has to be written into national constitutions or equivalent, and is overseen by national fiscal councils. this comes closer to the model of having decentralised implementation of rules, but with very little discretion. but will this be enough? i see two possible outcomes. the first is a stable equilibrium between centralised banking governance and decentralised fiscal governance. that is, banking union better insulates national budgets from financial shocks, meaning budget deficits are generally milder. and in this context, the fiscal compact provides sufficient medium - term credibility to allow fiscal policy

resources and risks across a larger and more diverse group, the overall shock - absorbing capacity of the system increases. in this sense, risk sharing turns into risk reduction ’. 9 in a working paper published a few months ago on the economic governance of the euro area, a group of researchers at the bank of italy reviewed the measures taken concerning sovereigns and banks since 2010 and concluded that europe is now at a crossroads : ‘ either it finds the strength to return to its roots and embraces a second ( and deeper ) round of reforms based on enhanced risk sharing, or it risks running into pro - cyclical excesses that may finally tear it apart ’. 10 this forum may therefore provide a valuable contribution to enhancing the awareness of policymakers about the dramatic, yet possible outcomes of a piecemeal, short - sighted approach to the completion of banking union. 8 bank of italy, financial stability report no. 2 / 2016, november 2016, p. 36 - 37. 9 ‘ the importance of a genuine banking union for monetary policy ’, vienna, 24 november 2016 10 balassone et al.