The aim is not only to strengthen the institutional  BIS central bankers’ speeches  3  architecture but also to advance the implementation of the single market. The ECB’s position in this respect is well-known. Here today I would like to warn against an illusion which seems to be spreading among policy-makers in Europe. The illusion is that the economic governance of the euro area can be strengthened not by increasing the responsibilities of policy-makers, which would mean stronger European institutions and stronger rules, but rather by delegating to financial markets the task of selecting the appropriate policies that authorities must abide by, in particular with respect to budgetary policies. One avenue that has been advocated by some is to make more explicit the conditions under which countries, like companies, would not repay their obligations and would restructure their debts or even default. The proponents argue that such explicit rules would improve the ability of markets to price sovereign risk and, thus, to exert discipline on governments with a view to achieving sounder fiscal policies. This view is predicated on the general principle that investors should bear the consequences of their decisions. Although at first sight this may seem reasonable and fair, it is wrong not only in theory but also in practice. The reasons are simple and include the following: First, as over 50 years of IMF experience have proven, market assessments of the solvency of countries tend to be wrong.
Lorenzo Bini Smaghi: Monetary and financial stability in the euro area Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the Europe Festival Conference on “The state of the Union”, Florence, 10 May 2011. *  *  *  Introduction It is a great pleasure for me to contribute to this Europe Festival Conference on “The state of the Union”. Before turning to my assigned topics, which concern the euro and the monetary policy of the Union, I would like to start with a few general comments. There can be no doubt that these are challenging times for Europe. But the current crisis does not just affect Europe, it affects the whole of the West. Problems such as the sustainability of public finances and the role of the state in the economy, immigration and burgeoning income inequality, concern not only Europe and the euro area, but the whole of the industrialised world. Moreover, this is not a cyclical crisis but a structural one, resulting from the profound changes now sweeping the world. Hundreds of millions of people have risen over the survival threshold, over two-thirds of the world’s population has opted for the market economy model, and there is a perception of a lack of progress in economic and social development and also in civil rights in a large part of the world. There is probably no historical precedent for the speed at which these changes are taking place.