In short, some hard work has been done in the euro area to unwind imbalances and to reinforce governance. But there is still a lot more hard work to do. Maintaining the current momentum of reform is essential for putting the euro area on the path back to stability. Fragmentation in monetary policy transmission Let me now turn to the measures being taken by the ECB. 2  BIS central bankers’ speeches  The confidence crisis and the process of adjustment across the euro area has weighed on short-term growth and dampened inflationary pressures. To maintain price stability, the ECB has lowered its interest rates to historically low levels. But before August this year, our low interest rates were not reaching companies and households evenly across the euro area. In some countries, interest rate reductions were being fully passed on. In others, lending rates barely declined. And in a few countries, they had actually risen. This divergence happened because banks in some countries had found it increasingly expensive to obtain funding from market sources. They therefore could not pass on the lower interest rates to their customers. This meant that monetary policy was unable to support the real economy in these countries. Smaller companies were affected the most, as was clear from our surveys of SMEs. And as companies in the euro area are very dependent on bank loans for financing, some economies were being forced into a damaging cycle. Economic activity was weakening. Public finances were deteriorating.
Financial union is essential in a single currency area where cross-border capital flows can lead to credit booms and other imbalances – and where the negative effects of a bust can spread rapidly to other members. One essential part of financial union is a single banking supervisor. As you know, the European Commission has recently proposed that the new supervisor should be based at the ECB. This is important to ensure consistency across the euro area and to prevent regulatory capture. Day-to-day tasks, however, would remain with national supervisors who have the competence and resources to implement them. But financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness. In the longer term, all four pillars are equally important. They are the bedrock for the enormous potential of the single currency for Europe’s citizens. Completing economic and monetary union would give citizens greater security against any future crisis. It would create the foundations for sustainable growth and employment. For all citizens of the euro area, it is therefore essential that Europe’s leaders stay on course. Thank you for your attention. BIS central bankers’ speeches  5