The crisis has created a vicious circle between the real, financial and public economies The current European sovereign debt crisis has its origins in the period before 2007. In the absence of a common fiscal policy, budgetary discipline in the euro area should have been safeguarded by the Stability Pact. But, by 2003, it could already be seen that the implementation of the Stability Pact was weak. The financial markets also treated the euro countries as a homogenous block for a long time. Consequently, warning signals in the form of interest rate differentials between countries were absent. When the global financial crisis impacted what were often weakly-capitalised banking systems, and the ability of many countries to support their financial systems became questioned, the crisis became acute. The crisis has often been described as a vicious circle between the real, financial and public economies: weak growth in the economy leads to  2  Goodhart, C & Rochet, J-C (2011): “An evaluation of the Riksbank’s monetary policy and work with financial stability 2005-2010”. 3  Haldane, A (2010): “The $ billion dollar question”. 4  This is reported in, for example, European Banking Federation (2011): “Facts and Figures 2011/2012”. 5  Haldane gives an interval of 90–350 per cent for the global economy, depending on assumptions of the extent of the permanent effects. BIS central bankers’ speeches  5  problems in the banking sector; banking problems generate costs for the state; the public sector has to implement austerity measures to maintain credibility, and this reduces growth.
As the European Central Bank president, Mr. Jean-Claude Trichet has recently underlined “the international interdependencies are too large for purely national or regional rules to be optimal and there is a clear need to strengthen global governance, in particular in the financial field”. In the case of the European Union, the crisis has exposed fundamental weaknesses of the European economy, revealing growing internal imbalances. The functioning of the European  BIS central bankers’ speeches  1  Monetary Union has been under particular stress as the existing surveillance procedures proved to be not comprehensive enough. Therefore, more effective economic governance in the European Union and the euro area is seen as achievable through five main pillars: fiscal discipline, broader economic surveillance, closer coordination, a robust framework for crisis management, stronger institutions and rules-based decision making. At this point, let me say that just recently the European Union has taken important decisions to ensure that Member States coordinate their economic policies more closely. The new economic governance is therefore based on three main responses to the crisis: •  reinforcing the common economic agenda with closer European Union surveillance  •  safeguarding the euro area stability  •  and repairing the financial sector  As a result of these decisions, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. To conclude, I would like to emphasize here that economic governance is a topic that concerns us all.