aligned sufficiently, as the imf pointed out in a recent report. 1 but even though the fiscal pact has stiffened the rules, genuine european control of fiscal affairs still requires a quantum leap in terms of ceding sovereignty to the supranational level. as this seems to be out of reach at the moment ; steps are needed that encourage each part of the system to behave responsibly, while at the same time making the system more robust against failures of its constituent parts. severing the overly close link between banks and sovereigns is a crucial example in that regard. the banking union goes a long way towards ensuring that taxpayers do not foot the bill in the event of a bank failure. defining a clear hierarchy of creditors is crucial in that regard. shareholders and creditors have to be first in line when it comes to bearing banks ’ losses. the proposed bank recovery and resolution directive is a big step forward, but the “ toward a fiscal union for the euro area ”, imf staff discussion note, september 2013. bis central bankers ’ speeches current proposal still allows for discretionary exemptions from bailing in creditors. in the interest of market discipline, this should change. and to further strengthen market discipline, the single resolution mechanism will have to ensure that banks without a viable business model can exit the market in an orderly fashion. such a regime is crucial not only for financial stability, but for sustainable growth as well. a functioning resolution regime strengthens incentives for effective credit monitoring and moderates banks ’ risk appetites. in so doing, it enhances the allocation of capital and reduces the risk of a bubble emerging. but the sovereign - bank - nexus goes both ways. we also need to make sure that worsening public finances do not infect the financial system. the banking union still has a sovereign virus, as daniel gros from the centre for european policy studies puts it. to strengthen the banking union ’ s immune system, we need to end the preferential treatment for sovereign debt. sovereign bonds have to be adequately risk - weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt. at present, sovereign bonds are treated by european regulators as risk - free – an assumption that stands in contradiction both to the no - bail - out clause and to recent history. an adequate risk weighting of sovereign bonds would make banks more resilient if the fiscal position of the respective sovereign were to deteriorate. and it would bring spreads

the economy is bound to recover, but recovery is not necessarily just around the corner. the imf expects the us economy to grow at a rate of 2. 2 % in 2003. according to this es - timate, the euro area can expect gdp growth of 1. 1 %, while germany should brace for a third year in a row with significantly sub - par growth of 0. 5 %. in 2002, north america and non - japan asia were the main contributors to world output growth, with the euro area and japan lagging behind significantly. two implications are worth consideration : 1. first, the world economy is depending far too heavily on the us taking the driver ’ s seat. the euro area and japan must work on improving their ability to produce self - sustained economic growth. 2. second, the world economy is even more fragile than this tilted growth performance suggests at first sight, for the growth path of the us economy itself is somewhat unbalanced. its macroeconomic imbalances deserve careful addressing. the expectation that the world economy will return to a healthy and stable growth path once the dust of war in the middle east has settled is unrealistic to begin with. obviously, the workload for the world economy to return to healthy growth will be high on both sides of the atlantic. in the euro area structural weaknesses have been building up for more than a decade. they are well known, as is the adequate therapy. labour market inflexibility is the core european weakness. in a currency union, market flexibility is all the more crucial as exchange rates can no longer cushion asymmetric shocks. the euro - area countries now need to seize the opportunity to embark on serious reforms during times of crisis, where the reform zeal is more pronounced than at more quiet times. the key message the present situation of the world economy conveys for europe is that europe would be well - advised to improve its ability to grow on its own. a tripolar economic and financial world cannot afford to rely on one pole only. europe, especially now that european union enlargement is just a year away, has a responsibility to assume in at least three areas : the political, the financial and the economic field. we are prepared. we have strengths we can build on. the framework for economic and monetary union is sound and strong. you probably know that a european convention is working on drafting a european constitution. for over four years we have had a single currency, the euro. first,