followed the lehman bankruptcy – which many refer to as the “ great recession ” – changed all this. it has brought the debt problem forward. the crisis and the recession have forced euro area countries to face their responsibilities right away. this entails undertaking very substantial adjustments now. let me provide you with some reflections about the two main components of sound finances in more detail. the fiscal component of sound finances failings in national governance caused severe fiscal strains in quite a number of euro area countries, while, at the same time, european governance lacked teeth. the stability and growth pact was even weakened in 2003 – at the behest of some of the largest euro area countries – and then reformed in 2005. this was not the only problem. financial market discipline, another powerful deterrent, was virtually absent until well into the crisis, but came back with a vengeance over recent years. financial markets became dysfunctional driving sovereign risk premia of a number of euro area countries ever higher. hence, two important deterrents were missing in the first decade of emu. after the bankruptcy of lehman brothers, automatic fiscal stabilisers cushioned the impact of the crisis, and many european governments introduced economic stimuli programs. on top of this, the financial recapitalisation required was immense in some countries. as a consequence, deficits soared and governments ’ indebtedness surged. the overall public sector deficit in the euro area increased from 1. 4 % of gdp in 2006 to 6. 2 % in 2010. at the same time, general government debt in the euro area rose from 68. 5 % in 2006 to around 85. 6 % in 2010. however, according to the european commission ’ s latest forecast, the deficit ratio should gradually decline to below 3 % of gdp by 2013, while the aggregate debt ratio in that year is projected to exceed 90 % of gdp. this is a challenging legacy of the crisis. today, a number of countries have embarked in fiscal consolidation programs, and as you know, greece, ireland and portugal are now implementing ambitious adjustment programs. hence, fiscal policies are adjusting as a response to the crisis. but how can public finances be returned to soundness more fundamentally? how can sound fiscal institutions, and therefore sound fiscal governance, be secured in the future? the new bis central bankers ’ speeches fiscal compact – that is soon to be ratified – is a step in the right direction. 1 it addresses some of the weaknesses of the previous fiscal governance framework. the fiscal compact

? as i already said, the crisis has revealed weaknesses in the prevention side of economic governance. but, there were also other gaps in the architecture of euro area institutions. this became apparent in early 2010 after the onset of the sovereign debt crisis in greece. one after the other, fiscally weak euro area countries saw their sovereign risk premia rising and a “ 6 - pack ” came into force in december 2011, and a “ 2 - pack ” is soon to be finalised. they already envisage diverse strengthenings of the stability and growth pact. two more supervisory agencies were also created : the european insurance and occupational pensions authority ( eiopa ) and the european securities and markets authority ( esma ). bis central bankers ’ speeches their rating downgraded. as a consequence, their sovereign spreads soared. an adverse feedback loop set in : a vicious circle by which weak sovereign hurt banks and the need for bank recapitalization and refinancing hurt sovereign. risk aversion by market participants soared : there was contagion. the architecture of the economic and monetary union ( emu ) had been designed without a proper framework to manage a sovereign debt crisis ( and which may have slowed down contagion ). one side of this institutional gap is now being addressed through the establishment of firewalls such as the european financial stability facility ( efsf ) – and the forthcoming european stability mechanism ( esm ) – with their framework for sovereign crisis management and resolution. some further steps are still needed. for example, there are only national arrangements for interventions to resolve crises of big pan - european banks. some account for a large share of national gdp of their home country. thus, while progress was made on the sovereign side : we still lack a european crisis management and resolution framework for systemically important banks ; there are as yet no funds earmarked or clear provisions to help in the recapitalization of big banks ( although the esfs / esm might acquire such a mandate as well ) ; and the fundamental issue of institutions that are “ too big to fail ” has only started to be addressed. hence, it is fair to say that while a lot has already been achieved, some hard work remains ahead of us in order to secure fundamentally sound finances. a competitive economy international competitiveness, i. e. a free, flexible, innovative and open economy, is the third pillar of ordnungspolitik. economic agents need to fu