Greece accepted €110 billion of bilateral loans in May 2010. The European Financial Stability Facility (EFSF) was created by Euro member states in May 2010. As part of the overall rescue package of €750 billion, EFSF was able to issue bonds guaranteed by European Area Member States (EAMS) for up to €440 billion, subject to conditions negotiated with the European Commission, in liaison with the European Central Bank and International Monetary Fund, and to be approved by the Euro group.

Ireland received €85 billion bailout out of which €22.5 billion came from the IMF and €45 billion came from European governments. Fiscal prudence is lost in Europe. It is not only Ireland, as it now has spread throughout the region. The same has been repeated in Greece and Portugal, with Spain not far off. Most of the large economies have a huge gross debt to GDP ratio, while the convergence criteria have been breached and the measurement mechanisms have failed.

Portugal became the third European nation to accept a financial bailout to the tune of €78 billion in May 2011. Under the terms of the deal, Portugal agreed to a number of measures to increase its tax revenue and reduce spending, by cutting the public sector wage bill, freezing wages and limiting job promotion, increasing sales tax on items such as cars and tobacco, privatising stakes in national energy companies, selling its national airline and reducing the most generous state pensions.

In the European Union monetary policy is in the hands of the European central bank. However fiscal policy is with national governments to impose central discipline. There were two areas which draw attention on account of this arrangement. Firstly it suffered in comparison to the US ,where the existence of a sizeable federal budget means there can be the transfer of resources within the economy, where it is more restrictive in the European union. Secondly it allowed countries to take advantage of the collective security provided by the European central bank ,but was not fully in compliance with the fiscal policy.

The Euro is gone unless they completely converge their fiscal and monetary union. They have to either live with their current monetary union or give it up. Fiscal integration is required to get back on track. The problem for countries such as Portugal,Spain and Greece is that years of inappropriately low interest rates resulted in overheating and rapid inflation. Financial integration in the wake of the adoption of the euro contributed to strong cross-border capital flows in government debt, inter-bank markets, and the non-tradable sector. The non-tradable sector boomed and the banks' cross-border exposures were built up. The asset price bubbles emerging in the non- tradable sector were not confronted which resulted in boosting their profitability. The regulatory reforms were not sufficient to address the challenges arising from global banking. Financial markets failed to reject mounting vulnerabilities in risk premiums until it was too late for a soft landing.

Southern European countries are trapped with an overvalued currency, and suffocated by low competitiveness. Strong policy responses have successfully contained the sovereign debt and financial sector troubles in the periphery of the euro area, but contagion remains a tangible downside risk. In emerging Europe, public finances have also sharply deteriorated and banks are burdened by large numbers of non-performing loans.

Reducing fiscal vulnerabilities will be equally important, as key fiscal indicators have deteriorated more than in other emerging economies. Fiscal discipline and implementation of structural reforms is the key to prevent downside risk.

Strengthening the European Union-wide crisis management framework is critical in securing a successful overall outcome. To be effective, the bank stress tests need to be followed by credible restructuring and recapitalization programs. A second wave of bank consolidation and the prospective introduction of Basel 3 offer opportunities to strengthen the sector. Global Governance has to come to bring in transparency.

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