peers. especially italy, which has larger accumulated debt, has undertaken bold budgetary cuts. both countries have speeded up their budgetary consolidation and are implementing balanced budget rules to their constitutions. * * turning now to banking, we can see that the markets and banks themselves are not happy with the condition of the banking system, as shares have declined and interbank markets are not working as well as one would hope and expect. in europe, the systemic liquidity of the sector is supported by the european central bank which continues to provide liquidity on a full allotment basis, against a broad range of collateral, both marketable and non - marketable. the ecb has committed itself to continuing this flexible method of liquidity provision as long as necessary. and the amount of collateral available in the market is large enough to allow even much greater creation of liquidity than at present, if demanded. i think that the main problem with the banking system is that a further recapitalization of banks is already long overdue. this is the case throughout the world. perhaps this task is especially urgent for the euro area, because uncertainty regarding the health of banks aggravates the negative effects of economic imbalances and divergence in the area. bis central bankers ’ speeches this should be the task primarily of the shareholders of the weaker banks, who should refrain from taking dividends or should inject more capital if needed. in some cases, government investment in bank equity may also be necessary. coming from finland, i can understand very well the political problems involved in cleaning up the banking system. in the 1990 ’ s, after the great finnish banking crisis, the finnish government had to support the asset management company that handled the banks ’ problem assets, in amounts that at one point reached about 10 per cent of gdp. most of this money was later recovered, but in the meantime taxpayers were furious. the public frustration with the costs of the banking crisis has not been forgotten in my country. despite the short - term discomfort it entails, the resolution of banking problems is necessary for us to move forward to a lasting recovery. on the one hand, the recapitalization of the weaker but viable banks is necessary to restore confidence. on the other hand, the wellmanaged closure of weakest banks is necessary, so that they do not distort the market for the viable banks. an important part of the decisions of july 21 by the euro area heads of state or government was

the fiscal discipline in each country and render the matter less of an issue of eu policing of the countries ’ current fiscal actions. the euro plus pact also broadened the scope of policy coordination. bis central bankers ’ speeches previously, the stress had been on deficits and debt ; now, the competiveness issues ( such as relative labor costs ) and financial stability were also included. as i already mentioned, the eu is just now adopting an important legislative package which will strengthen the stability and growth pact and the macroeconomic surveillance framework of the eu. this package includes, among other things, a directive on the budgetary frameworks of the member countries. this will be important for what is called the “ european semester ” – the new annual review of members ’ budgets before their adoption nationally. the package will also make the sanctions enforcing the stability and growth pact more automatic, by the socalled reverse voting mechanism. both the preventive and the corrective arms of the stability and growth pact will be made stricter. in the preventive arm, policy coordination will extend to the growth rate of public expenditure of the member countries ; in the corrective arm, the debt norm ( 60 per cent of the gdp ) will be promoted to an equal position to the deficit norm ( 3 per cent ). also macroeconomic policy coordination is strengthened by the “ six pack ” legislative package. it includes regulation of macroeconomic imbalances which is aimed to prevent the accumulation of imbalances or loss of competiveness of any member of the euro area. the imbalances covered include current account deficits and surpluses, among other things. this policy coordination is underpinned by sanctions which are levied on a country which does not follow the recommendations of the eu council to address these excessive imbalances. bis central bankers ’ speeches