This literature has long called for a strengthening of fiscal rules, but also for euro-area wide bank supervisory bodies in order to bypass dangerous incentives at the national level to tolerate imbalances in the domestic banking sector, with associated risks of contagion and systemic crises (Uhlig, 2002). Indeed, the current dire situation is the result of the lack of effective and enforceable rules, i.e.
of the lack of a credible fiscal commitment. Before the crisis, after initial efforts to consolidate public finances, some governments have enjoyed increasingly feeble external pressures to put their own house in order, thanks mainly to favourable global economic conditions, and have reverted to unsustainable fiscal stances.