15 Mar Speech Gertrude Tumpel-Gugerell: Introductory remarks to the press conference on the announcement of the EU-funded cooperation programme between the ECB and the Central Bank of Bosnia and Herzegovina.

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB,

Sarajevo, 15 March 2010

Dear Governor Kozaric, Dear Ambassador Kourkoulas, Ladies and gentlemen,

It is a pleasure for me to be back in Sarajevo. My last visit was in 2007, when I attended a conference hosted by Governor Kozari? in celebration of the tenth anniversary of the Central Bank of Bosnia and Herzegovina. Today we have the pleasure to announce the start on 1 April of our second technical cooperation programme, through which we will further the European integration project in the area of central banking. We are very pleased to be working in close cooperation with the Central Bank of Bosnia and Herzegovina and welcome the opportunity to further intensify this cooperation.

If we look back over the last couple of years, the Central Bank of Bosnia and Herzegovina was the first central bank of the current candidate and potential candidate countries for joining the European Union to work closely with the ECB and partner central banks on a needs-analysis project. This work was carried out in 2007 and resulted in a list of recommendations on how to bring the Central Bank of Bosnia and Herzegovina into line with EU central banking standards. Today, the Central Bank of Bosnia and Herzegovina is again taking the lead: it is the first central bank to announce a programme of technical cooperation following an earlier needs analysis.

I would like to express my gratitude to the Delegation of the European Union to Bosnia and Herzegovina for supporting this programme, during which the European Central Bank (ECB) and seven central banks of the euro area will be working closely with our colleagues at the Central Bank of Bosnia and Herzegovina. I am sure we will, as usual, enjoy a very fruitful working relationship with our colleagues at the Delegation.

We at the ECB, along with our partners, have a keen interest in Bosnia and Herzegovina, in the Western Balkans and in the EU’s neighbouring countries more generally. Our economies are closely linked, as are our cultures and history. The financial crisis has been a clear sign that we live in an integrated international economy, where banks and other financial institutions operate across borders and where the markets for financial instruments are truly global. Many of the banks that operate here in Bosnia and Herzegovina are owned by banks from the European Union.

Links between financial institutions and in particular ownership links have for years been considered to be a stabilising factor. The new phenomenon of banks from the old EU Member States taking over or setting up banks in the new Member States or in the Western Balkans was considered good for the transfer of know-how. The solid capital base of the parent institution and its ability to support the subsidiary in case of difficulties in the local market were highlighted as other advantages of such ownership. The current financial crisis has shown, however, that these links can create spillovers and that these spillovers between entities in a group can go both ways.

In Bosnia and Herzegovina, we have seen a rather stable development with, so far, no apparent destabilising effects resulting from such ownerships. I believe that there are a number of reasons for the success in maintaining stability. First, I think we have to recognise that the authorities in the countries hosting subsidiaries of banks from the European Union have applied and ensured compliance with adequate prudential rules that did not allow local banks to be highly leveraged. Second, the so-called “Vienna Initiative” or European Bank Coordination Initiative under the leadership of the IMF, [in which the ECB participates as an observer,] has been an important instrument for continuing the support of subsidiaries, and maintaining the functioning of local markets. Third, I believe that the good relationship between central banks and supervisory authorities has been instrumental in maintaining an open dialogue and in identifying solutions where such solutions were needed. Overall, let me emphasize that we have to remain vigilant and attentive to financial stability. We must work together to find the best solutions. These have to be global and regional; they certainly cannot be national in an integrated market.

Let me now say a few words about the programme of technical cooperation with Governor Kozari? and his team that we are announcing today. We are very pleased that you, Mr Governor, on behalf of your board and staff, have invited the Eurosystem to work with you again on this technical cooperation programme. The aspirations of Bosnia and Herzegovina to join the European Union and its status as a potential EU candidate country imply the need to adapt to EU rules and standards. Once the overall conditions are met and Bosnia and Herzegovina joins the European Union, the Central Bank of Bosnia and Herzegovina will join the European System of Central Banks, and it is therefore also important to continue working towards compliance with the standards and rules relating to central banks.

We have seen a lot of progress on many of the recommendations made by us in 2007. One example is the publication of a financial stability report, which you have today on your website. The areas for this upcoming technical assistance were identified by you. Your management and staff have been working closely with the ECB’s project management team – present here today – to define your specific goals and the working methods you will use. I think that the programme that will start on 1 April is very ambitious and I am confident that, together, we can achieve what we are setting out to do.

During the next 18 months you will be working closely with experts from the ECB as well as with experts from national central banks of the Eurosystem. I am very pleased that we have found leading experts who will be able to support you in the areas of your choice.

What will we be working on? First, there are three areas that were covered during the needs analysis programme: statistics; economic analysis and research; and financial stability. Then there are the new areas: these relate to legal harmonisation, improvements in your IT resources, and coordination of your integration with the EU.

There will be a need to coordinate efforts in the six different areas and for expert support in some areas on a day-to-day basis. This will be the main task of Ms Mara Vyborny, a central bank expert with experience from the Oesterreichische Nationalbank and the European Central Bank, who will be our Resident Programme Coordinator here in Sarajevo. Mara is here today, and I would like to wish her every success in this undertaking.

The analysis of the Central Bank of Bosnia and Herzegovina’s current status in relation to reaching the targets of the programme and the ensuing guidance on how to do so will be carried out and provided by the ECB, together with colleagues from the national central banks of Germany, Greece, Spain, Italy, the Netherlands, Austria and Slovenia. I would like to warmly greet the representatives from several of these participating central banks who have accompanied me here today.

As was the case when we worked together in 2007, I am sure that we will find you, Mr Governor, and your staff to be highly motivated partners. From our side, rest assured that you will be able to rely upon our commitment and enthusiasm, both on the part of the ECB and of the partner central banks and their respective experts.

I would like to wish all parties involved the very best of luck.

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When you buy a life insurance policy, you are providing money to support your loved ones after you pass away. By paying a premium each month, you are insuring that your family will have the money to pay for a funeral as well as have money for monthly expenses after you are no longer here to support them financially. It is income protection insurance which replaces the money you earned during your lifetime with money paid out by the policy.

If you are interested in applying for life insurance, you must first find a broker and then fill out an application. The application will require basic information such as your name and age as well as detailed information about your health history. Most insurance companies require you to undergo a general health physical by one of their own doctors to determine the state of your overall health.

After you have completed a physical and turned in your application for life insurance, it will be reviewed by a person known as an actuary whose job it is to determine if you are a good risk for the company to insure. Some factors that are used in determining risk are your age, occupation, whether you smoke or if you regularly engage in dangerous activities.

If the actuary determines you to be an acceptable risk to the life insurance company, you will be approved for a policy. The monthly premium will be based on how long the actuary predicted you would live under normal circumstances. People who are older can expect to pay higher rates, as well as those with chronic health conditions.

You should review your contract as soon as you receive it to make sure you understand the amount of coverage you have, how long the policy is in effect for and what your monthly premium will be. You will also need to name one or more beneficiaries who will receive payment from the policy upon your death. In order for the life insurance policy to be considered valid, you must sign it and make your first monthly payment.

We’d like to thank Miss Sue Lang VEC on this great article.

Forex Trading is a complex, challenging, and potentially lucrative pursuit that is best undertaken by those with knowledge and experience. Requiring an understanding of international markets and the ways in which those markets interact, the uninitiated face serious challenges from professionals and well-educated retail investors alike. The forex market is the most liquid in the world and can move rapidly.

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Operate Forex.com was founded to promote education about and the advancement of forex trading at all levels. Below is some basic information about forex trading, particularly online. You are encouraged to review this material and delve more deeply into those areas that will provide you with the most significant benefits.

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In general terms, Forex trading is the buying and selling of various currencies for the purpose of profiting from changes in foreign exchange rates. While there are dozens of currencies that can be traded, the most closely tracked currencies are the British pound, the U.S. dollar, the Euro, the Australian dollar, the Canadian dollar, the Japanese yen, and the Swiss franc. Despite this diversity of participants, there is no central location at which the market operates. Instead, largely through online participation, countless numbers of participants make millions of trades per day. Online forex brokers are becoming increasingly advanced and offering even more comprehensive services.

As a starting point, it is important to understand that driving foreign exchange relationships are the relative levels of inflation, GDP, and interest rates in each of the respective countries involved. These factors are of critical importance because they define the expected return of a given currency, the potential purchasing power of a given currency within its country of origin, and most importantly, the relative attractiveness of these currencies. Understand purchasing power is central to understanding foreign exchange because it allows apples-to-apples comparisons across international borders.

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What an investor is interested when switching between currencies is not the number of units received, but rather the number of widgets that can be purchased with each currency involved.Forex trading is an attempt to increase purchasing power by moving between the currencies of different countries.The above discussion only begins to scratch the surface of the knowledge available of forex trading. OperateForex.com is a forum to for participants to not only expand their personal knowledge, but to contribute to the knowledge base of the community. Exploring a wealth of topics and perspectives, OperateForex.com hopes to become the single best source of knowledge on online forex trading.

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Even as the US Federal Reserve Bank embarked on a second round of ‘quantitative easing’ intended to combat fears of recession, higher than expected inflation figures from China drove the prices of commodities and commodity backed dollars lower as the week ended. In Australia this news was coupled with a negative unemployment report and profit taking after the Australian dollar hit a record high against both the US dollar and the Euro.

Emerging markets have led established markets out of the recession, driving strong demand for raw materials. Stimulus efforts in the US which have depressed the dollar relative to other currencies have further driven up the price of dollar denominated commodities.

As commodity prices have increased, so have the value of commodity currencies relative to the US dollar. The Australian dollar has benefited from this trend during the latter half of the year.

However, the week ended with sobering news. Chinese government officials are increasingly concerned with inflationary pressures, and may raise interest rates in an effort to slow economic growth. China remains the largest single export market for Australian raw materials.

Against the Euro, the Australian dollar also ended the week on a downward trend, although the currency did spend much of the week above last Friday’s high.

Along with these external factors, unexpectedly poor unemployment numbers released Thursday (unemployment went from 5.1% in September to 5.4% in October) led to Friday’s sell off.

Looking ahead, Australia’s economy continues to outperform many other industrialized nations, and the upward trend against the dollar seen over the last 6 months should continue, subject to actions by China to curb economic expansion. The RBA, however, faces a challenging task. A rising tide may not be lifting all boats, and increases in the RBA’s lending rates have created concerns for consumers, as reflected in lower consumer confidence levels.

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Robert, skilled financial adviser is bringing you the article “Test your financial adviser”

What are the basic questions that one must make when investing in funds?
First of all, the investor must have defined your financial objectives: what you want to invest and what is their capacity to save? With this information the counselor may ask what fund or funds are for him: series, commissions, income, information leaflet and so on. There is still much misinformation, and the fault of the financial intermediaries. But the investors have a responsibility to learn. The problems come when the fund reports negative returns and investors want a satisfactory explanation. certified investment advisor is to give advice, not just to sell funds. A fund adviser is trained to help their clients design a personal financial plan?

A fund adviser is trained to help their clients design a personal financial plan?
If we refine the way estate investor, we need to know how much you have on your saving accounts and how it invests and how not only the amount you wish to invest in capital, in bonds, how often you need the money, why you want your investment, where you get income, etc., all for arming a tailored portfolio. Within each portfolio must have funds, and the percentage depends on the needs of the customer, amount, purpose and horizon. The point is to establish good communication between counselor and client.
For example If you decide to invest in a bonds be sure to have a fixed rate bond because they are highly susceptible to a loss in a value due to inflation. This way they will offer you a solidified return. They are ideal for people who have spare money that they can afford to lock away for a fixed period of time.

The counselor may say: “This is your profile and they will match the funds, but if the client is not convinced, need to ask to get to the answers that satisfy. For example, if you invest in an equity fund can lose money because the market is volatile. If it comes at a time in which the fund is a drop in its stock price, will follow a loss. However, it is profitable for those who drive a minimum investment horizon of five years. The percentage is determined according to their profile.
In the case of a debt fund, you have to question the type of paper you have, the percentage of each participating so, why they bought it, and so on. Thus, giving all the arguments and reasons why you should take a background and no other, is how you can decide if you should or not.
Many people ask what is the most profitable fund to place their money there.

It is important to note two things:
1. Past performance does not guarantee future performance.
2. The most profitable fund may not be best for you by the level of risk in your portfolio managed (private or stock lot of paper).
Yields can be very attractive, but the question is: does the investor stomach to endure the volatility? A client can not ask for anything more for a fund performance and I did not I can offer only under this parameter, because what happens if the client tells me I need the money in six months? Offer even knowing this, it is unethical.

How to maximize the profitability of investors with funds?
First you have clearly defined the investment profile, with the objective of the investment and the period in which you want to achieve. This helps us to select appropriate funds to comply. A fourth element is discipline. The returns on investment are not magic, you have to continue to make (no matter) regularly, or at least not touch the money. Another element is to diversify, because the portfolios already include many actions and many roles of debt.

To invest in stocks, should we start with a fund indexed to the CPI?
Whether in a fund or direct investment, capital market is long term: five years minimum. In a developed economy is challenging the results of an investment fund after five years, and compared performance against the benchmark, and if not met its objectives, capital moves to another fund. The investor should be aware that this is a high risk investment. We must have the stomach to ride out the volatility, understanding how the market and have enough money to not depend on the investment.

I think they close the year financial markets?
We’re at the end of restrictive policies in all economies by central banks. In fixed income, TIIE will continue to maintain about 4.9 and 5%. In cetes, the rate is lower. A theme to follow is inflation. In the case of shares, and focusing on nothing else in Mexico, most analysts estimated that the CPI close en35 thousand points, provided the domestic and international economic variables are kept in line with what we already know. At the exchange rate as we continue to see very strong, between $ 12.70 and $ 13.00.

We’d like to thank Miss Sue Lang on this contribution to our web page.

The Euro tipped higher during the overnight trade to reach a high of 1.3701, and the single-currency is likely to face increased volatility going into the U.S. trade as the Federal Open Market Committee is scheduled to announce their interest rate decision at 18:15 GMT

Talking Points

- Japanese Yen: Down Across the Board

- Pound: U.K. Home Prices Jump Higher in January

- Euro: German Investor Confidence Weakens for the Sixth Month

- U.S. Dollar: FOMC, Housing Starts on Tap

- U.S. Dollar Loses Ground Ahead of FOMC Interest Rate Decision

Meanwhile, EC President Jean-Claude Juncker said he is “convinced” that a Greek bail will not be “necessary” after European policy makers laid a broad framework on how to help the ailing economies operating under the fixed-exchange rate system, and went onto say that “there are still a number of technical questions” which he pledged to address “in the next few weeks.”

Meanwhile, investor confidence in Germany weakened for the sixth consecutive month in March, with the ZEW survey slipping to 44.5 from 45.1 in the previous month, while the gauge for the current situation increased to -15.9 from -54.8 to top forecasts for a rise to -52.0. Moreover, the ZEW survey for the Euro-Zone weakened to 37.9 from 40.2, which exceeded expectations for a drop to 38.5, and investors may continue to lower their outlook for the economy as policy makers anticipate to see an uneven recovery this year. At the same time, consumer prices in the euro-region increase 0.3% in February, with the headline reading for inflation slipping to 0.9% from a revised 1.0% in the previous month, while the core CPI weakened to an annualized pace of 0.8% to mark the lowest reading since recordkeeping began in 1997. As price pressures remain subdued, market participants speculate the European Central Bank to hold the benchmark interest rate at the record-low of 1.00% next month as the Governing Council maintains its one and only mandate to ensure price stability.

The British Pound bounced back on Tuesday to reach a high of 1.5125 against the greenback, and we are likely to see the GBP/USD maintain the narrow range carried over from the previous month as the Bank of England is widely expected to maintain a dovish outlook for future policy. Meanwhile, a report by the U.K. Department for Communities and Local Government showed home prices increased at an annual rate of 6.2% in January, which well exceeded forecasts for a 3.5%, and conditions are likely to improve turn higher over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy.

The greenback lost ground against most of its major counterparts, while the USD/JPY advanced for the second-day to reach a high of 90.69, and comments from the Fed later today is likely to spark increased volatility in the exchange rate as investors weigh the outlook for future policy. The FOMC is widely expected to hold the benchmark interest rate at 0.25% in an effort to encourage a sustainable recovery, and the central bank may maintain its pledge to keep borrowing costs at the record-low of an extended period of time as a result of the ongoing weakness in the private sector. Meanwhile, the economic calendar is excepted to show a 3.6% drop in housing starts following the 2.8% in January, while building permits are forecasted to slip 3.4% to an annualized pace of 601K in February from 621K in the previous month. At the same time, import prices are anticipated to weaken 0.2% after rising 1.4% in the previous month, and subdued price growth would certainly give the central bank scope to maintain its current policy throughout the first-half of the year as the MPC aims to balance the risks for growth and inflation.

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The European Central Bank (ECB) today announced a programme of technical cooperation with the Central Bank of Bosnia and Herzegovina, in collaboration with a number of euro area national central banks (NCBs). The EU has assigned EUR1 million to the programme from its Instrument for Pre-Accession Assistance (IPA). The aim of the programme is to support the Central Bank of Bosnia and Herzegovina in its efforts to implement the central banking standards of the European Union (EU) in preparation for Bosnia and Herzegovina’s accession to the EU. The 18-month programme, a follow-up to the needs assessment programme carried out in 2007, will start on 1 April 2010.

The programme was announced in Sarajevo by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB, Kemal Kozari?, Governor of the Central Bank of Bosnia and Herzegovina, and Dimitris Kourkoulas, Head of the EU Delegation to Bosnia and Herzegovina. All parties agreed that this programme is an important step in strengthening economic and financial cooperation between the Central Bank of Bosnia and Herzegovina and the euro area NCBs, as well as between Bosnia and Herzegovina and the EU.

The programme will cover six different areas, the first three of which follow up on the recommendations from the aforementioned 2007 programme: 1) statistics; 2) economic analysis and research; 3) financial stability; 4) harmonisation of legislation with the EU; 5) coordination of integration with the EU; and 6) improvement of the IT services at the Central Bank of Bosnia and Herzegovina.

The programme will involve experts from the ECB, the Deutsche Bundesbank, the Bank of Greece, the Banco de Espa?a, the Banca d’Italia, De Nederlandsche Bank, the Oesterreichische Nationalbank and Banka Slovenije. The ECB will dispatch a coordinator to Sarajevo for the duration of the programme.

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Economic situation and outlook

Ladies and gentlemen,

In autumn 2008, the world entered the worst financial crisis and the most severe economic downturn since the end of the Second World War. Since spring 2009, financial market conditions have improved. Economic growth has resumed in most countries, albeit very moderately in many advanced economies. These improvements have largely resulted from massive support measures taken by governments and central banks.

Likewise, we have recently seen further improvements in the outlook for the global economy. However, uncertainty is still high, as both fiscal stimuli and the inventory cycle, which are currently supporting growth in many countries, are transitory and as there remain risks to the financial sector.

In the euro area, recent information indicates that recovery is still on track. The global recovery that is underway and the positive impact of the policy responses to the financial crisis are the main drivers behind this development. However, ongoing balance sheet adjustments in the private sector, which are necessary, are likely to weigh on growth, just as low capacity utilisation will weigh on investment. In the same vein, weak prospects for the labour market will dampen consumption growth.

Therefore, the euro area economy is expected to grow at an only moderate and most probably uneven pace in 2010. This is in line with the latest projections by ECB staff [who predict real GDP growth of between 0.4 and 1.2% for this year and between 0.5 and 2.5% for next year]. The Governing Council views the risks to this outlook as broadly balanced.

As regards price developments, inflation and inflationary pressures have remained low over recent months. Inflation stood at 0.9% in February. The outlook for inflation is in line with price stability and the risks to this outlook remain broadly balanced. More specifically, we expect inflation to stay at around 1% in the near term, and to remain subdued over the policy-relevant horizon, largely on account of the abundance of idle resources and the moderate recovery. This is in line with the projections by ECB staff.

Our monetary analysis confirms the assessment of low inflationary pressures over the medium term, with money and credit growth remaining weak.

All in all, inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term.

Monetary policy – exit from non-standard measures

Let me now turn to monetary policy. As you know, we have taken bold action in response to the crisis. Given subdued inflationary pressures in the context of a severe economic downturn, the ECB lowered its key interest rates sharply. From October 2008 to May 2009, i.e. within a period of only seven months, we brought the main refinancing rate down by 325 basis points to 1%, a record low level not seen in the recent history of euro area countries. Overall, the Governing Council views the current low level of its key interest rates as appropriate.

To foster financing conditions and facilitate the transmission of lower key ECB interest rates to money market and bank lending rates, the Governing Council also introduced a number of non-standard measures. Notably, the Eurosystem provided unlimited liquidity to banks at a fixed interest rate and at maturities of up to one year. It also provided liquidity in foreign currencies, extended the list of eligible collateral and purchased covered bonds outright. Together, our non-standard measures have helped to improve financing conditions, especially in the money market, thus contributing to a better flow of credit to households and firms than would otherwise have been the case.

However, it is important to ensure that the non-standard measures do not remain in place for longer than is necessary, as this would entail the danger of significantly distorting money market participants’ perceptions of actual liquidity risk and their related behaviour. Therefore, in view of the improvements in financial market conditions seen since last spring, we decided in December to begin a gradual phasing-out of some of our non-standard measures.

In particular, we conducted the last 12-month operations in December and decided that the six-month operation coming up in two weeks will be the last. In addition, on 4 March, we decided to return to variable rate tenders in the regular three-month operations towards the end of April.

The Eurosystem will also continue its enhanced credit approach and provide liquidity support to the euro area banking system at very favourable conditions in its shorter-term refinancing operations (that mature after one week and after approximately one month). We decided to do this for as long as necessary and at least until mid-October this year.

These decisions help facilitate the provision of credit to the euro area economy. At the same time, the Governing Council will continue, in the context of its medium-term monetary policy strategy, to implement the gradual phasing-out of any extraordinary liquidity measures that are no longer needed, taking due account of economic and financial market conditions.

Such a medium-term orientation is essential in order to fulfil the ECB’s mandate of maintaining price stability in the euro area.

Thus, phasing out some of the non-standard measures to avoid risks to price stability at a later stage is fully in line with the ECB’s price stability mandate under the current circumstances. At the same time, the ECB will avoid too early an exit from its non-standard measures, as this would risk hurting the normalisation of financial markets and the recovery.

Of course, we do not know today what post-crisis normality would look like. Nor do we yet know the design of the “final” post-crisis operational framework. However, when talking about the end-point of the phasing-out, the operational framework that prevailed prior to the start of the financial turmoil in August 2007 might provide a good benchmark. Should we fully revert to this, only a very few policy parameters remain – in particular, the tender procedures to be applied in the main refinancing operations and the operations with a duration of one maintenance period, which is approximately one month (a return to variable rate tenders).

The monetary policy framework

Recently, some voices have argued that central banks should act as risk managers by organising their working framework with a view to avoiding events that may lead to deflation. It has been further argued that, in such a working framework, central banks should relax their targets and aim for significantly higher inflation rates. In this vein the question has been raised as to whether it would not be appropriate to have a permanently higher inflation target of 4%, as this would leave more room for monetary policy to react to large, adverse shocks.

I strongly oppose this notion. Any relaxing of central banks’ mandates in this direction would be a serious mistake. Let me explain why.

Certainly, it may be tempting for governments to suggest higher inflation in order to monetise the dramatic build-up of public debt. However, calling on central banks to raise inflation rates permanently takes the focus away from the overriding problem, which is that, at present, unsustainable fiscal policies represent a threat to macroeconomic stability in nearly all advanced economies. If, on top of the financial uncertainties and concerns about public debt, the general public were to lose trust in the purchasing power of money, the consequences could be grave.

Also, higher inflation increases distortions from taxes. It increases inflation variability and, hence, uncertainty for investors. This implies higher long-term real interest rates, as investors would want compensation for the increased uncertainty. Thus, a permanent increase in inflation curtails, rather than stimulates, long-term growth. Empirical evidence confirms this negative relationship.

Using monetary policy to manage macroeconomic risk would avoid policy restrictions when benign shocks reduce inflation, as was the case when China and other low-cost economies started to increase their market shares some years ago, thus fostering asset price booms, excessive risk-taking and financial imbalances. When the asset price boom finally turns into a bust, such a policy would lead central banks to overreact to the negative shocks.

So, financial stability is undermined in two ways: first, by a pro-cyclical monetary response to benign disinflation in good times; second, by moral hazard in financial markets, stemming from the expectation that the central bank will protect the markets from “tail events” in bad times, thus encouraging too much risk-taking. This would certainly also set wrong incentives for fiscal policy-makers.

Fiscal policy

This brings me to fiscal policy issues. The crisis began as a financial crisis and evolved into an economic crisis. There is now a clear risk that we will enter a third wave, a sovereign debt crisis in most advanced economies. Many euro area countries are faced with large budget deficits and sharply rising public debt levels. While it was right to also take extraordinary fiscal policy measures to avoid a 1930s-style depression, a timely exit from the fiscal stimuli is now crucial in the context of ongoing economic recovery. Any undue delay will have serious negative side-effects on confidence and economic welfare.

Let me remind you that unsustainable fiscal policies complicate the task of monetary policy, as they might lead to higher inflation expectations and higher uncertainty about the inflation outlook in the medium term. As a result, upward pressure on long-term interest rates might lead to a crowding out of private investment, which would, in turn, be detrimental to potential growth and contribute to adverse spill-over effects. High debt ratios reduce the room for governments to counter a new downturn by letting automatic stabilisers operate or even adopting discretionary stimulus measures. Indeed, with fiscal sustainability under pressure, fiscal multipliers can turn negative and a fiscal expansion can induce higher precautionary saving and, consequently, an economic contraction. This underlines the importance of reducing debt levels, and of having effective tools to counter serious downturns in the future.

As a result of the budgetary loosening in the context of the economic and financial crisis, many euro area countries will need to engage in ambitious fiscal consolidation to put their debt levels back on a declining path towards the Maastricht reference value of 60% of GDP. Simulation results suggest that even with average annual consolidation efforts of 0.5% of GDP, returning to the pre-crisis euro area debt ratio would take around two decades.

Therefore, to safeguard government solvency and sustainable fiscal positions in the euro area countries, governments must give fiscal consolidation top priority, taking the ongoing recovery of the economy into account, and bring their deficit ratios to below 3% of GDP, in line with the recommendations by the Ecofin Council. Consolidation efforts will have to last for several years in many countries. In Europe, the Stability and Growth Pact provides the appropriate framework for the coordination of the necessary consolidation policies. It is now crucial that all governments strictly adhere to their commitments under the Pact. Supporting national fiscal frameworks should be strengthened wherever necessary.

The situation in Greece shows how important it is to strictly apply credible fiscal rules. A lesson to be learnt from the recent events is to strengthen the fiscal rules in the euro area and to enforce their application.

Need for structural reform

Healthy economic growth could alleviate fiscal strains to some extent, by reducing the size of existing debt relative to the size of the economy and by improving the annual budgets. This underlines the importance of increasing our economies’ growth potential. The starting point, however, is not the best. Most estimates suggest that the turmoil lowered both the level and the growth rate of the euro area’s potential output. It is therefore crucial to accelerate structural reforms that will reinforce sustainable growth and job creation. Policies that enhance competition and innovation are urgently needed to speed up restructuring and investment, and to create new business opportunities. Increased labour market flexibility is required to create employment and restore competitiveness. Restructuring of the banking sector, aimed at sound balance sheets, better risk management and increased transparency, is also of the essence.

Concluding remarks

Let me conclude.
The global economy shows signs of an ongoing improvement. In the euro area, we are also on the road to recovery, albeit at a moderate pace. Uncertainties remain high.
As regards our monetary policy stance, we still view the current level of the ECB’s key interest rates as appropriate, given continued low inflationary pressures and our current assessment of the risks to price stability over the medium term.

At the same time, improvements in financial markets since spring 2009 have justified a gradual phasing-out of non-standard measures. These decisions help to avoid distortions associated with the maintenance of our non-standard measures for longer than they are needed.
This does not mean that the crisis is over. There is no room for complacency. We cannot rule out setbacks. New challenges may arise. Greece is a case in point.

Thus, central banks need to provide an anchor of stability and confidence. Any attempt to weaken or even lift this anchor would be a step in the wrong direction.

Thank you for your attention.

European Central Bank
Directorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
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