José Manuel González-Páramo: Sovereign contagion in Europe Speech by Mr José Manuel González-Páramo, Member of the Executive Board of the European Central Bank, at the Distinguished Speaker Seminar of the European Economics and Financial Centre, London, 25 November 2011. *  *  *  Ladies and Gentlemen, It is a great pleasure to speak to you here in London and discuss some key issues relating to the ongoing crisis in Europe. For centuries the City of London has held its position as a leading international financial centre. Few other places in the world exhibit such a high density of expertise in financial matters. At the same time, where financial activity tends to be concentrated experiences with financial contagion during crises are often also pronounced.
However, it suffered from weak national implementation and a lack of enforcement at the European level. Enforcement of the SGP was built on a peer pressure mechanism among Member States. In the past, however, Member States proved to be reluctant to enforce adequate fiscal discipline on their peers. Moreover, decision-making bodies at the EU level were left with a  10  See A. van Riet (ed., 2010), “Euro area fiscal policies and the crisis”, ECB Occasional Paper, no. 109, April (http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp109.pdf). 6  BIS central bankers’ speeches  significant degree of discretion regarding the implementation of the fiscal rules, notably following the 2005 reform.11 Incentives for ensuring sound national fiscal positions have as a consequence been insufficient. Member States failed to adhere to their medium-term budgetary objectives and only slowly corrected excessive deficits. As a result, a number of euro area countries accumulated large fiscal imbalances already in “good times”, instead of using opportunities for reducing public deficits and debt levels. Therefore, they were left with hardly any room for manoeuvre when the financial and economic crisis hit. In the wake of the crisis, the substantial underlying fiscal and structural weaknesses in a number of euro area countries, as well as the inability of the current governance framework to prevent the emergence of such imbalances, became very apparent.