Stronger crisis prevention mechanisms are now in place and a new crisis management framework has been developed. We have financial backstops. A Single Supervisory Mechanism and a Single Resolution Framework have been decided. Most of the countries in IMF/EU/ECB adjustment programmes are “graduating” successfully, and several other stressed countries are implementing structural reforms and financial consolidation. These are important steps forward, towards a more stable and equitable functioning economic and monetary union. We have certainly turned a corner and stabilised the situation. It is an important achievement but it is not the end of the road as it is too soon to declare that the crisis is over. The euro area still faces large challenges in terms of lacklustre growth, excessive unemployment, remaining fragmentation and a low inflation period that threatens to aggravate the burden of the debt overhang still besetting governments and private economic agents. That the stressed countries were able to restore fundamental equilibria, like their external accounts, and to resume positive economic growth is of great importance. However, we face now structural medium term challenges that impair the European potential growth rate. In my remarks today I will concentrate on issues such as the changing financial integration and financial stability nexus, on how to restore a sound and resilient financial system and finally on the need to improve our analytical tools and policy instruments.
Yet, these are necessary but insufficient conditions to ensure that the banking system will again become a vibrant financial engine of growth. Why? Because, over long periods of time, the soundness and resilience of banks also hinges on the dynamism of the economy and society: hence the habitat of banks also has to draw itself out of the crisis. The sustainability of public and private finances and the health of the broader financial system are also critical components in securing a successful and resilient banking system. The crisis has left a heavy, uneven structural legacy across the euro area As the earlier stages of this multi-layered financial crisis unfolded, it became apparent that several banks had grown far too large for their economies, making the fate of several governments and banks ever more intertwined. Fears of debt unsustainability in Greece sparked concerns also about the public finances and financial health of other euro area countries. Some speak of a twin crisis of “two debt overhangs”. Others speak of the “sovereign-bank nexus”: they are all referring to the same phenomenon. 2 That was when the “doom loop” between weak sovereigns and weak banks took hold to full effect and when the flaws in the design of Economic and Monetary Union (EMU) became most damaging. 3 While significant progress has been made towards rectifying governance failings and design flaws, the burden of the crisis on sovereigns, households and banks is considerable and unevenly distributed.