general council. importantly, the esrb will not change in any way the mandate and the functioning of the ecb ’ s statutory role, and the same holds true for all central banks in the eu. i believe that a key strength of the new institution will lie in the diversity of its members. each of them will bring different knowledge and expertise in the many influences on the financial system. indeed, fruitful interaction between esrb members will be critical to ensure an all encompassing system of macro - prudential oversight of the eu ’ s financial system. but the task of the esrb will be very challenging. we launch this body at a time when important parts of the financial system are still under strain and far - reaching structural and regulatory changes are ongoing. the esrb ’ s mandate is wide - ranging, covering any material systemic risk that threatens the stability of the eu ’ s financial system ; the system ’ s contribution to the smooth functioning of the single market ; and its sustainable contribution to economic growth. the esrb ’ s main tasks are threefold : to identify and prioritise systemic risks ; to issue early warnings when significant systemic risks emerge ; and to issue policy recommendations for remedial action in response to the risks it identifies. the esrb will not focus on individual institutions, individual countries or individual macroeconomic issues – rather, the institution should have a strong horizontal focus, across countries, across sectors and across the boundaries between the financial sphere and the real economy. interlinkages and spillovers should be key terms in its analysis. to achieve these tasks, the esrb will draw on information from many sources, including strong analytical input from its members ; intelligence gathered from financial system participants ; and the data necessary to understand the nature of the intricate interlinkages that define the financial system. esrb analysis must be broad - based covering potentially any aspect of the eu ’ s financial system – markets, institutions and infrastructure. in particular, it should extend to those areas of activity that reside outside the usual regulatory scope, often referred to as the “ shadow ” system. the esrb does not have binding powers per se. it must convince through the quality of its work. to achieve credibility, it must ensure that warnings are well - timed and that recommendations are specific and well - targeted. to reinforce its actions, the esrb has been given the responsibility of following up, including, where necessary, alerting the council and the european parliament, when it judges that compliance is less than

lucas papademos : the political economy of the reformed stability and growth pact - implications for fiscal and monetary policy speech by mr lucas papademos, vice president of the european central bank, at the conference “ the ecb and its watchers vii ”, frankfurt, 3 june 2005. * * * introduction i would like to start with two propositions and two observations about the stability and growth pact. the first proposition is that in a monetary union, which is characterised by a single monetary policy and decentralised national fiscal policies, there is a need for a fiscal policy framework that ensures that excessive budget deficits are avoided over the medium term and that national fiscal policies are effectively coordinated to that end. the second proposition is that the best means to achieve the necessary coordination is a rules - based framework which fosters transparency, consistency and equal treatment across countries in fulfilling their commitment to avoid excessive deficits and attain sound budgetary positions. i believe we can all agree about the validity of these two propositions. the two observations concern the experience with the stability and growth pact over the past six years. the first is that the sgp did not succeed in preventing the occurrence of excessive deficits in several euro area countries – though i am convinced that those countries ’ budgetary positions would have been worse if the pact did not exist. the second observation is that the pact ’ s rules and procedures for the correction of excessive deficits proved inadequate to guide fiscal policies towards a prompt and steady reduction of deficits and the achievement of a balanced budgetary position. consequently, there was a need to strengthen the pact ’ s preventive arm and to improve the implementation of the excessive deficit procedure. this was the view of the ecb in the light of the experience of the past few years and not on the basis of theoretical arguments concerning the features and modalities of the pact. i will not address the reasons for the ineffective functioning of the pact in the past, though i believe that a correct diagnosis of the cause of observed failures would be useful in assessing the prospects for success of the reformed framework. i will directly focus on four key topics concerning the implications for fiscal and monetary policy of the agreed changes to the original framework. i. consequences for fiscal sustainability and stabilisation first, what are the likely consequences of the recent changes to the stability and growth pact for fiscal sustainability and for fiscal stabilisation policy? the general answer is that it is too early to judge the implications of the recent reform of the