the stability and growth pact. the crisis has revealed some of the shortcomings of national policies to comply with the requirements of an economic union. in particular, in a number of cases, national policies that are responsible for domestic public finances and for the competitiveness of member economies have not achieved their objectives. but the crisis has also revealed weaknesses in the peer surveillance process and in the implementation of the stability and growth pact. thus another major lesson of the crisis is the need to strengthen the institutional framework of the economic union. of course, the deterioration of public budgets has partly been due to a “ migration ” of risk from the financial sector to the public sector. public budgets have been called on to absorb the excessive risk that the financial industry had been creating during the booming years that led up to the crisis. partly, however, the deterioration of public budgets is also due to some short - sighted fiscal and economic decisions in the brighter times that preceded the crisis. before the crisis, weak public finances had combined in some countries with inattention to domestic competitiveness and a lack of long - term strategies to prepare national economies for competing successfully in the challenging – but rewarding – environment of the internal market. in greece, in particular, past fiscal irresponsibility and inattentiveness to domestic competitiveness made the national economy extraordinarily vulnerable to a sudden turn in confidence. as i have implied, after the crisis, the main players in the world economy will be judged by a new yardstick. private players will be held accountable to new and stricter standards of economic integrity and prudent management. and governments, the world over – and in europe in particular – will have to show self - discipline and trustworthiness to gain respect and preserve confidence. that is why financial reform will have to go hand in hand with fiscal reform. fiscal reform will reinforce confidence. in the current situation, we have to – and we do – stand firm on these principles. speculation on more and more elevated sovereign risk has been one factor behind spreads being driven to very high levels. this is why it was very important that the heads of state and government declared on 11 february 2010 that they were ready to “ take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole ”. i said, on behalf of the ecb, that i approved of this important statement. in this respect let me stress the following : loans are not transfers, and loans come at a

like education, electricity, economic and social planning and family planning. in addition to provision of general administration, state governments thus provide various social and economic services and also transfer resources to the third tier of government – rural and urban local bodies such as municipalities. in keeping with larger responsibilities assigned to the states, their expenditure accounts for a substantial portion of the government sector expenditure ( centre plus states ) in india and stands higher than in several other countries such as australia, denmark, argentina, usa and germany ( world bank, 2005 ). while the state governments collect about one - third of the total government sector receipt, they incur more than three - fourths of the total expenditure on social services and more than half of that on economic services. the states ’ ability to undertake and perform the developmental functions adequately and effectively is critically predicated on their fiscal position, which is a function of their own efforts in generating resources – tax, non - tax receipts and borrowings as also the resource transfer from the central government. sub - national borrowings article 293 of the indian constitution imposes certain restrictions on the borrowings by state governments. the article stipulates that a state may not, without the consent of the government of india, raise any borrowings if it has any loan outstanding, which is repayable to the government of india. furthermore, under the constitution, state governments, unlike the centre, cannot borrow externally. the centre plays the role of an intermediary in the transfer of external borrowings to states. because of these controls exercised by the centre, there is not much scope for fiscal profligacy at the state level and accordingly, there have been no instance of bankruptcy by any state government. this also represents the largely unitary structure of the indian federal polity despite the significantly important constitutional roles that have been assigned to the sub - national governments. the major heads of borrowings by states include : ( i ) open market borrowings, ( ii ) special securities issued to national small savings fund ( nssf ), ( iii ) loans from banks and financial institutions ( negotiated loans ), ( iv ) loans from the centre, ( v ) state provident funds, ( vi ) deposits and advances and ( vii ) reserve funds. loans from centre “ loans from the centre ”, which used to be a major source of state finances have since lost its significance. special securities issued to national small savings fund ( nssf ) the central government has set up the nssf, which is akin to a