I believe that two major mistakes were made: –  First, countries – including France and Germany – weakened the Pact by failing to comply with the provisions of its preventive arm (they were not in balance over the cycle but permanently close to the 3% deficit ceiling), or those of the corrective arm (they never abided by the sanctions). –  Second, the euro area did not equip itself at the outset with an instrument for monitoring competitiveness. The basic premise is important and simple: when joining a monetary area whose goal is to achieve a rate of inflation of just below 2%, changes in its unit production costs must be in line with this central bank objective. In all the countries that did not abide by this calculation and this discipline, year after year, there was a loss of competitiveness. The crux of the matter is that, as soon as countries were approved for euro area membership, they considered that they were protected simply because they belonged to a single currency area: as their fiscal or competitiveness gaps were no longer penalised by the markets that indiscriminately lent to all euro area Member States at the same rate. When doubts started to emerge, the markets reacted rapidly, violently and often excessively, although it must be said that real underlying problems existed. How the euro area sovereign debt crisis has been dealt with to date What have we done to tackle the urgent issues stemming from the crisis and to deal with the underlying problems?
Moreover, I have regularly given the exact facts and figures concerning our banks’ exposures 4  BIS central bankers’ speeches  and their ability to deal with extreme scenarios. But once this mechanism is set in train, it is hard to stop it. A little over two weeks ago, a European summit offered even more far-reaching solutions to calm the crisis: the EFSF’s capacity was doubled, banks’ capital is to be bolstered more rapidly than planned and Greece’s creditors have accepted a 50% debt writedowns (compared with the 21% agreed on 21 July). I firmly believe that these are the right solutions. With this debt relief and the loans offered by the EFSF, Greece can achieve debt sustainability. I am sure that it will manage to do so if the agreements are fully implemented and if it meets its commitments in the areas of tax collection, structural reforms and privatisation. These efforts are obviously painful and require public support, but they are the only way for Greece to get back on its feet. Dealing with the underlying problems In addition to tackling the urgent issues stemming from the successive crises, it has been absolutely necessary for each country to implement all the efforts needed to restore them to a sound fiscal path. From my point of view, all countries have taken their responsibilities to do so. Their credibility is now at stake and they must be committed to bringing their public finances back into balance as soon as possible.