and private consumption were propped up while, in some instances, capital imports helped to fuel bubbles on domestic real estate markets. the surge in demand, combined with inflexible labour and product markets, reduced the price competitiveness of the countries in question. as a result, current account deficits became entrenched or widened even more. although these macroeconomic imbalances are domestic in origin, the associated problems are not confined to the national level. given spillover effects in the closely integrated euro - area financial markets, macroeconomic imbalances in some member states can easily turn into a problem for the rest of the monetary union, especially if they are accompanied by a poor state of public finances. sustainable public finances are indeed essential for the functioning of a monetary union, both to be able to react to asymmetric shocks and to safeguard the independence of monetary policy. the main challenge in the pursuit of sound fiscal policy is that national governments have an incentive to enjoy the benefits of public debt, while its burden is borne by all members of the monetary union. a public deficit in one country boosts demand there but, at the same time, puts pressure on the interest rates in the whole monetary union, reducing economic growth in all member states. in extreme cases, such a free - rider policy not only puts pressure on the interest rates but might also affect the credibility and stability of the monetary union as a whole – as has been demonstrated by the debt crisis. to ensure that sustainable public finances are regarded not just as an entry requirement for monetary union but also as an ongoing task, a strong institutional framework is needed ; a set of rules that aligns the interests of national fiscal policymakers with the rest of the monetary union and bridges the gap between national fiscal policies and a union - wide monetary policy. this led to the creation of the stability and growth pact ( sgp ). in essence, the sgp requires governments to keep their budget deficits within clearly defined limits. however, since its very inception, the sgp has been subject to political tactics which have greatly reduced its effectiveness. this problem reached its peak in 2005 when germany and france insisted on a reform of the sgp that, all in all, softened the provisions of the pact. as a result, many governments did not seize the opportunity to consolidate their budgets during the ensuing economic upswing. thus, when the financial crisis hit, a number of countries already had weak public finances. the subsequent expenditures to support the financial system and

are still to be taken at a political level by the european council. this leaves too much room for discretion in interpreting and applying the rules of the sgp. with regard to macroeconomic imbalances, i have mentioned the need to enhance macroeconomic surveillance in the euro area. nevertheless, to make one thing clear from the outset : the objective of such an endeavour should not be to coordinate or fine - tune macroeconomic policies – member states have to remain responsible for their national economic policies. rather, the objective should be to detect and address macroeconomic developments that might have serious negative spillovers on other member states or the euro area as a whole. against this backdrop, the actual proposals that have been put forward are a step in the right direction. however, detecting such possibly harmful macroeconomic developments ex ante is notoriously difficult and some details still have to be discussed. thus, even though enhanced macroeconomic surveillance is indispensable, its actual implementation might prove difficult and could easily lend itself to discussions that distract from the real challenges – past demands on germany to implement a more expansionary wage policy and to set more fiscal stimuli being a case in point. having an eye on macroeconomic developments and placing limits on budget deficits and public debt by means of an enhanced sgp will certainly help to make the euro area more stable. nevertheless, the occurrence of crises can never be ruled out. for that reason, it is necessary to have a crisis - resolution mechanism in place. as the current european financial stabilisation facility ( esfs ) and the european financial stabilisation mechanism ( efsm ) will expire in 2013, the european council has decided on the main features of a european stability mechanism ( esm ), which will then replace the efsf and the efsm. the “ no bail bis central bankers ’ speeches out ” clause has been affirmed as an essential element of the esm : no member state is responsible for the debt of other member states. this certainly helps to maintain incentives for sound fiscal policy. incentives are further strengthened by provisions that allow for a restructuring of private sector debt in case of insolvency. faced with the prospect of losing money, financial markets should penalise unsound fiscal policies at an early stage and thus prevent the build - up of excessive deficits. in the further negotiations, it will be important that these basic features of the esm are maintained. 5. conclusion ladies and gentlemen the euro is probably the single most