As soon as the euro was adopted, they ceased to differentiate between countries and sovereign yield spreads narrowed, even aligning themselves at the lowest levels, i.e. those of Germany and France. For the first decade of EMU, the single currency appeared to play a buffer role that in addition to protecting countries against monetary instability – which the euro successfully did and was its raison d’être – also protected them against the economic reality. Member States were labouring under the illusion that they could, without ever suffering the consequences, allow themselves to flout the rules for budgetary discipline or make no efforts to remain competitive. The crisis came as a very severe wake-up call. 3. The third cause of this crisis, interlinked with the other two, is institutional: monetary union was not built on sufficiently robust economic, fiscal, financial and political institutions. The fiscal discipline mechanisms were insufficient, there was no mechanism for the surveillance of macroeconomic imbalances, nor was there a crisis management mechanism; financial union worked when times were good: banks held the bonds of other Member States, but it very rapidly fragmented when the crisis erupted, due to the lack of institutional soundness. 2. The causes of the crisis are being addressed  I will now explain how the euro area is dealing with the three fundamental causes of the crisis it is facing.
The principle underlying this single supervisory mechanism is that the severity of the crisis in the euro area has largely been due to the vicious circle that developed between banking and sovereign risk. To break this link, we need to have a genuine institutionalised banking union that ensures not only the same supervision throughout the euro area, but also identical rules, an integrated bank crisis resolution mechanism and a common deposit guarantee scheme. We are moving towards the banking and financial union that was missing from monetary union. 3. The Eurosystem is providing valuable support during this period of necessary reforms  It is clear that the ultimate responsibility for exiting the crisis lies with governments, at national level – implementing reforms, consolidating public finances and restoring competitiveness – and at the collective level – agreeing on and implementing a more coherent and comprehensive institutional framework around monetary union. These reforms are obviously – and fortunately – the fruit of a democratic process and can only be that. But  BIS central bankers’ speeches  3  the corollary to this is that these necessary reforms cannot be immediate: they take time, first to be implemented and then to yield their effects. And the time of the markets is not that of democracy, as you know. Doubts and delays create nervousness, volatility and worry in financial markets, which often leads to sharp rises in interest rates for countries deemed to be vulnerable.