This internal consistency explains why monetary policy is the only part of the EMU framework that has clearly functioned as designed. Fiscal policies were supposed to conform to the other form of governance, where countries would decide on and execute their own budgets, but within the strict constraints of the deficit and debt limits set in the Treaty. Those limits were supposed to be policed by markets, the Commission and other Member States, but in practice the incentives of the latter to enforce the rules were weak. This meant that de facto rules could be applied with discretion, while Member States themselves decided on how to exercise that discretion – in other words, the worst combination of the two forms. The result was that fiscal positions diverged significantly, which then created substantial spillovers for other euro area members. But perhaps more fundamentally, internal inconsistency meant that fiscal policy itself became ineffective in several jurisdictions. A number of governments either did not have the fiscal space to absorb the shock they faced in the early stage of the crisis, or they were unable to maintain the trust of the market when investors finally reacted – and over-reacted. Fiscal policy therefore had to effectively give up its stabilisation function – which is vital with a single monetary policy – and switch to convincing investors of debt sustainability. Prudential policies were also supposed to fit the decentralised model, although here the framework was even looser.
David Rule: PRA Solvency II Conference – countdown to implementation Speech by Mr David Rule, Executive Director for Prudential Policy of the Bank of England, at the PRA Solvency II Conference, London, 17 October 2014. *  *  *  I would also like to extend my welcome and thanks to you for taking the time to attend this conference today. I want to take this opportunity to formally introduce myself. I was appointed Executive Director of Prudential Policy at the Bank of England in June having held a variety of different roles across the Bank and FSA, most recently as a supervisor of large UK banks. This conference is entitled “countdown to implementation”. We have reached a level of stability in the policy making process for Solvency II, and the purpose of today is to share our thinking and provide clarity where possible on those last remaining issues ahead of implementation. You’ll be hearing from experts across the technical areas and Victoria Saporta, Director of Financial Policy will give you an overview of the policy areas where work is still being finalised along with the timeline for completion. I would like to take a step back from this and reflect more widely on what Solvency II is about for the Bank.