The deterioration was particularly significant in countries in which: (1) pre-crisis growth had been of an unsustainable and unbalanced nature – typically as a result of an over-reliance on the expansion of private credit and the contributions of housing-related sectors (notably construction and housing finance) – and (2) in which governments had failed to take advantage of favourable developments in the years of booming growth in order to consolidate their public finances. Over time, concerns about the size of government deficits and soaring debt-to-GDP ratios – combined with uncertainty about the ability of governments to design and implement consolidation plans in the context of reduced potential growth and massive implicit liabilities towards the financial sector – developed into uncertainty about the sustainability of government debt. Although the initial problems primarily concerned the Greek government debt market, contagion and spillover effects meant that the crisis quickly spread to the sovereign debt of other so-called “peripheral” countries and other market segments. In particular, financial markets turned their attention to the solvency of some “peripheral” economies that were perceived to have been hit particularly hard by the crisis because of long-standing structural and institutional weaknesses. The deterioration of public finances in some euro area member States has impacted negatively on investors’ confidence in government bonds issued by these countries, and thus led to further turbulences in the financial markets. This is also reflected in the sharp increase in the yields on the government bonds issued by those countries.
This is essential in order to map out the way forward for the European Monetary Union, which I will now briefly sketch. III. The way forward  The way forward for the euro area and the EU requires a number of initiatives in key areas in order to guarantee the public authorities’ ability to continue delivering macroeconomic and financial stability. In my view, the building blocks of any comprehensive plan of reform for Europe are the following:   implementing fiscal consolidation and securing the sustainability of public finances;    promoting sustainable growth and job creation;    enhancing the crisis management framework;    improving economic governance;    strengthening the financial sector.   Let me briefly elaborate on these points. III. (a)  Implementing fiscal consolidation and securing the sustainability of public finances  The financial and economic crisis has led to a very considerable deterioration in the fiscal positions of euro area countries, in terms of both large budget deficits and rising government debt. However, the economic recession amplified imbalances in fiscal policies that had built up gradually long before the crisis, reflecting the failure by many countries to implement sound fiscal policies during past periods of strong economic growth. On the institutional side, the EU’s fiscal framework, which is embedded in the Stability and Growth Pact (and that had been watered down in 2005), proved to be too weak to enforce fiscal discipline and was not implemented with sufficient rigour.