Structural features of the financial system, such as the role of ratings in financial regulation and investment mandates, create an embedded non-linearity in market reactions to news. What we witnessed in the euro area, therefore, was not a rigorous analysis of sovereign risks but rather an undershooting followed by a dramatic, and perhaps excessive, correction. Spreads converged for all euro area countries before 2008, despite high debt levels in some countries and clear evidence of emerging imbalances. Now we have moved to the opposite extreme: some euro area countries are confronting phenomena like sudden stops and buyers’ strikes that were in the past associated only with emerging markets. As we have seen in recent months, market discipline can be a strong and useful force in encouraging countries to make long-needed reforms. But it is also, clearly, an unstable way to ensure good policies. Reform decisions have to be made hastily in dramatic meetings. Politicians lack time to explain the need for reform to their constituencies and build consensus behind them. It may even be the case that countries have to go “too far, too fast” to restore market confidence. There is also a serious risk of uncontrollable contagion to other countries. In other words, we cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of  BIS central bankers’ speeches  3  ratings agencies and markets. It needs economic governance arrangements that are preventive and linear.
Eurobarometer surveys find cross-country majorities in favour of closer cooperation to end the crisis. And this is ultimately unavoidable, given the state of political union between countries that monetary union de facto creates. It is now a time for politicians to be bold and courageous, to recognise these trends, and to complete as soon as possible the great project begun 60 years ago towards “ever closer union”. Thank you for your attention. 8  BIS central bankers’ speeches