 Thank you very much for these kind words of introduction ladies and gentlemen. It's a pleasure to be back in Dublin Last time I came to Dublin was half a year ago Not to address such a distinguished audience not a numerous audience, but only two members of the new appointed government at that point in time very distinguished politicians And last time I was here at the Institute I think it was five years five years ago a few weeks after I joined the Executive Board of the of the of the ECB now ladies and gentlemen these are Very challenging times for you here in Ireland, but also for us in Frankfurt And I think for all governments in the European Union and in particular in the in the euro area very challenging times With this sovereign debt crisis, which has re-intensified I must say and now spreading Over to the to other countries of the euro area including as we have seen last week since last week also to So-called core countries of the of the euro area. This is a new Phenomenon, however, let me add already from the outset that the fiscal crisis the sovereign debt crisis is not only Concentrated in in Europe all advanced economies or most of the advanced economies are facing Serious problems in their in their public debt and high deficits a close of the double digits or with debt or GDP ratio is Which have exploded since 2008-2009 on average by 25 to 30 percent of GDP in some cases more than 40 percent of GDP and now countries that Run a debt or GDP ratio of about 40 or 45 percent in 2007 today run a debt or GDP ratio of 85 percent or even 100 percent advanced economies apart from Japan not to mention Japan because Japan is a special case with the debt or GDP ratio of 220 percent so this is an an issue for all advanced economies to address this challenge and to pursue politics policies in order to To assure the sustainability of Of the debt at the same time we see in continental Europe that Investors are reassessing their exposure in sovereign debt and We see a process an ongoing process of deleveraging So maybe we are facing at present Let me say a paradigm shift as far as public debt is concerned a paradigm shift in a way That the debt tolerance is declining and that investors Have a closer look to the underlying economic fundamentals in respective countries before they invest in in the in these in these countries At the same time ladies and gentlemen the longer this sovereign debt crisis last the more likely Will be negative spillovers to the real economy in particular via the confidence channel and For this reason I have to say it be this conflict this Sovereign debt crisis is mainly a Confidence confidence crisis a confidence crisis in a way that Financial market tense intentions have unfavorable effects on the financing on financing conditions and on confidence and all this is likely to dampen Economic growth in the near term If not in the in the medium term the second that There is a lack of confidence in the sustainability of public debt third that a lack of confidence in the ability of politicians to Do the right things and to do the right things right? And finally there are increasing fears about longer term longer term impact of the sovereign debt crisis on economic growth and on jobs Now very briefly on the global situation where we stand at present globally we see strong headwinds and for the global economy Which continue to restrain the recovery In particular again in the advanced economies. We still see these still strong growth in emerging market economies Global growth is mainly driven by emerging market economies with very strong growth and According to international institutions global economic the global economic activity Will grow by around 4% in 2011 and a bit less in 2012 at the same time the world trade volume Will grow around 7% this year But again will grow a bit slower in 2012 this according to international institutions in their projections or Forecast all in all what we can say about the global activity Is that global activity is moderating and All in all that world trade Dynamics remain weak for the euro area GDP growth is expected to be very moderate in the second half of 2011 however the third quarter surprised many people on the upside With strong growth in France and in Germany But we expect stronger dampening effects in the fourth quarter 2011 taking into account the The heterogeneity across euro area member states. We have very heterogeneous picture as far as economic activity is concerned now and the strong dampening effects in the fourth quarter are based on due to the Dampening and underlying growth momentum with a moderation in pace of global demand the negative impact of the overall financing conditions as I said already Resulting from the ongoing sovereign debt crisis But there are still positive signs coming from the emerging market economies and even if they most recently have seen some Some weakening or some decline in economic activity. However, this is in the context of the signs of overheating a welcome development now since the Publication of the Projections of our staff two months two and a half months ago for the euro area the survey data have become more unfavorable and Previously identified the downside risks to economic growth have materialized over the last couple of weeks and for this reason International institutions and organizations, but also European institutions have significantly revised downward their GDP Growth forecast for 2012 it is now in the range between 0.6 and 0.8 percent However based on the Most recent information our staff at the ECB expect not a Longer term Weakening in economic activity, but expect a temporary the soft patch as by definition as a temporary Phenomenon so all the discussion about Recession I must say we have to we should avoid to talk ourselves into Into a recession. There are many questions raised in the newspapers whether the global economy is facing Double dip Is it true that the Europeans the continental Europeans are responsible for? the slowdown in the economic recovery in the United Kingdom and in the United States I think all these countries have their particular problems so like in the housing market with unemployment and with the In some cases with a lack of the fiscal consolidation strategy very briefly on the price developments In October we had an inflation rate in the euro area as a whole on average 3% however, we say this is this belongs to the past we are in our monetary policy we are forward-looking and all the projections of international and private institutions and organizations point to Dissoloration in the inflation that for 2012 but also those who Make available projections are really for 2013 We see in this or this projection horizon and weight Moderation in inflation in line with what we have defined as price stability in in the in the ECB We have to expect decline in inflation rate in the course of 2012 Simply because of base effects Reflecting the strong increase in commodity prices in the in the first quarter of this year again We have they are facing heterogeneity across member states Now the fiscal situation. I mentioned already. This is the key the key point However, let me say all advanced economies have to carry out Fiscal consolidation measures to bring the deficit and the data GDP rush ratio under control without any correction The debt to GDP ratio will increase in the euro area in the year 2020 to 120 percent on average in the euro area How in the according to our estimates in the United States? It will increase to 150 percent of GDP until 2020 and in Japan to 260 percent. So you see there is an urgent need for fiscal consolidation However at present the euro area is in in the focus And it is more than just if the fiscal situation. It is also the structural weaknesses some countries are facing some countries which have lost price competitiveness since they Then they're joined the euro And as I mentioned already the fiscal this fiscal outlook for the euro area is also a threat To the economic outlook and for this reason decisive and front-loaded Action is needed to bolster public confidence in the sustainability of Government finances and this is vital not only for the program countries Greece Ireland Portugal. This is vital for all member states of the euro area The reasons for the explosion of public debt are well known In many cases the starting point was not a Good one and not a positive one. It was different in Ireland Starting from a very low level of debt to GDP ratio, but like in other countries the support of the the financial system the the automatic stabilizers which worked during the economic crisis and the fiscal stimuli in 2009 and 2010 led to this situation in in the debt to defeat that that ratio and the deficit and those countries were hit hardest with large or let me say over extended financial Sector and unsound fiscal positions already before the crisis So for this reason fiscal consolidation, let me stress it again is Indispensable and it has to go hand-in-hand with structural reforms in order to return to two levels which are sustainable now with the case of Ireland I must say that The fiscal consolidation is in line with the program There are good news. I must say And what has been done and what is still required is the rigorous implementation Which are the rigorous implementation in line with the program, but also in line with the excessive deficit procedure second point I would like to stress that Ireland was successful in completing the recapitalization And in the ongoing the leveraging of the of the banking system of domestic banks and the restructuring of domestic banks is progressing and that the action plan on the Market reform or labor market reform product market reform has made significant progress and we see now a significant improvement in the market perception which led to a strong decline in the in the in the spreads in the and the unsoverly sovereign bonds So it I must say it is worth to try to be ahead of the curve and to implement the program as Fully in line with the with the timetable which has been agreed upon And I think this in the end shows positive results Also positive results as far as the GDP growth is concerned in the first half of 2011 I think you are all aware what happened here growth was growth was faster than expected due to strong Export growth net export made a main contribution to the to GDP growth in the first half of 2011 and this is due to the fact that there was a correction in the Unilever cost strong decline in in Unilever cost or adjustment process also in this in this field all in all I must say Ireland the Irish economy has stabilized and in this respect the EU IMF program has helped to stabilize the Irish economy and I must say this is can be there should be a role model also for other countries Which are under program and the Irish case clearly demonstrates it is feasible it is possible to implement the program as long as there is support in the society and as long as there is in principal consensus across the political parties and I hope that This role model from coming from Ireland also will help to overcome the still ongoing problems in the new Greek government now ladies and gentlemen as far as the economic adjustment in the Monetary Union is concerned We are facing in the Monetary Union not only the fiscal imbalances, but also the current account imbalances deficits which were run in many countries of the euro area on the one hand the other side Surpluses however, not all in all cases the deficit of Counter-account deficit in one country is due to the surplus of Of the current account in another country this depends on the structure of the economy The export orientation of the economy the scope of products that are are exported to which no other advanced economy might have Might compete with so I think we have to this is a very complex issue Which have which we have to take in the account now the point I would like to make is that the macroeconomic imbalances and Unsustainable fiscal policies are the root of the current Sovereign debt crisis we are facing in the in the euro area and the existing Economic governance framework has not been able to prevent the emergence of excessive macroeconomic macroeconomic imbalances and moreover the fiscal policy coordination In the euro area turned out to be completely insufficient some countries have built up significant internal and External imbalances during the past decade and recorded inflation rates persistently above the euro area average so for instance the Euro area average accumulate accumulated from 1999 to 2010 an inflation was twenty six point five percent. So year-by-year Old accumulated from 99 to two thousand and ten twenty six point five percent. However, in the case of Greece We had an inflation accumulated of forty six point nine percent in the case of of Ireland Thirty four point six in the case of Portugal thirty three point eight in the case of France only twenty three point one and the case of Germany nineteen point eight over eleven years, so a clear picture Hidro very heterogeneous picture across the euro area member states and We have from the from the side of the ECB time it again warned against this heterogeneity Because we are operating under a single exchange rate of the euro area. So this Inflation differentials cannot anymore be compensated or corrected By adjustment of the of the exchange rate. I come back to this point immediately We have warned against this emerging imbalances at an early point in time, but From the political point of view from side of the governments. There was no urgency to address these emerging imbalances Now increases in labor compensation in some countries driven in most cases by high public sector wage increases exceeded productivity which led to Significant increase in the unit labor cost And unit labor cost growth for anum from 99 to 2010 Sturred increase at three point five percent. So annual increase in unit labor cost three point five percent increase in Spain two point five percent in Ireland two point six percent the average of the euro area unit labor cost increase per anum was 1.6 percent again reflecting this Significant heterogeneity across countries and also not to forget the the fact that The low interest rate environment But also a very let me say Expansionary fiscal policy Allowed for an increase in the indebtedness In Ireland less so in the public sector we had a strong or a substantial reduction in the debtor GDP ratio until 2007 but a sharp increase in the indebtedness of the corporate sector to 204 percent of euro area of the of the Irish GDP and the private households to 120.8 percent of the Irish GDP Compared to the euro area average of 104.6 on the corporate sector and 65.8 in the In the household sector these are figures for 2009 and all in all the private and public debt summed up until 2009 to 389 percent of Irish GDP and the euro area average stood at 249 you see a significant difference. So 104 percent 40 percent of GDP difference between the euro area average and Ireland and a certain point in time you must consider this is not a sustainable path At one point in time. This has to be corrected The issue is how and when Abrupt or more smoothly the soft landing or heart landing after a boom a bust or how to deal With the boom and in particular the question for the future how to avoid boom and bust in future Is this feasible to avoid boom and bust in the future in any case? now many factors Contributed to these developments including unrealistically optimistic expectations about future income developments and the underestimation of Credit risks by financial Institutions and not only credit risk by financial institutions in general We have to say that one of the main reasons for this financial and economic crisis Which ended up in a sovereign debt crisis was the inappropriate pricing of risk until 2007 the undershooting By market market participants in the pricing of risk and now we might see the opposite That markets move in the other direction with an overshooting in the pricing of risk and This is very likely will will stay very likely will stay With us for some for some time a key factor was that wage and income policies were not as I said already sufficiently geared towards Preserving competitiveness in a monetary union and governments failed to address structural structural Rigidities in the euro area economies in other words ladies and gentlemen, there were countries and governments Which have not adjusted to the conditions of a monetary union? They just entered the third stage of monetary union in 1999 with out changing their economic policy They qualified according to the to the Maastricht Convergence criteria that qualified for monetary union in the end This was also a political decision who qualified for for monetary union and also again political decisions who qualified later on when we extended the number of member states adopting the the the euro but There were not all countries were prepared for this situation to deal with the with the situation in which important Adjustment instruments are no longer available and We know that for economic adjustment in general there are three prices available the exchange rate the interest rate and Costs or let's say wages and and by nature in a monetary union the first two prices namely exchange rate and the interest rate are Set for the euro area for the monetary union as a whole but these instruments are no longer available at the national level So for this reason this requires an additional additional or other Instruments to make the economy more flexible Now that what does the monetary union mean in terms of adjustment channels Monetary union in this respect means the that the nominal exchange rate is no longer available So those components contributing to the real exchange rate are the components or are the elements or the instruments which are still available and this means that key conditions for an adjustment in a monetary union are Price flexibility Factor mobility in particular labor and fiscal transfers Now the price flexibility is important in order to let countries affected by adverse economic shocks recover by adjusting wages and Reducing relative prices in order to rebuild competitiveness The second adjustment mechanism the cross-border factor Mobility or in particular labor mobility Helps to adjust to adverse shocks as people move out of the depressed economy until it regains competitiveness and the labor market in the country finds a new equilibrium The third adjustment mechanism identified in the literature is fiscal transfers flowing from the stronger countries or from the economically stronger regions To the weaker parts of a monetary union Although these instruments are often Referred to as being substitutes. They are in fact not the first two price flexibility and Factor mobility are Important to solve the problem facing a country affected by an adverse shock The third one the fiscal transfers only hides the problem a temporary transfers can play Stabilizing role And maybe need it Subject to strict conditionality if a country is affected by a very serious adverse shock Open-ended so long-lasting transfers However are not a mode of adjustment and in fact, they are the opposite the finance the finance non-adjustment Let me remind you of a declaration Which was agreed by the European Finance Ministers on the 1st of May 1998 at first of May 1998 the European Finance Ministers followed by the heads of state and government agreed on the countries Which started with it to move to the which move to the third stage of EMU and there was a declaration Accompanying the council's recommendation on the member states participating in economic and monetary union and this declaration was endorsed or improved by the heads of state and government at the European Council in in in Cardiff in 9th in June 1998 I Quote without prejudice to the objectives and provisions of the treaty It is agreed that economic and monetary union as such Cannot be invoked to justify specific financial transfers This is a clear statement and the author of this sentence is by accident in this room today So No transfers Temporary loans Based on strict conditionality. This is exactly what the EU IMF programs are about adjustment with the support of the European partners Adjustment with the support of the international community Represented by the international monetary fund now ladies and gentlemen the key adjustment mechanism in a monetary union is price and wage flexibility and This was known already in 1998 before the start of the of the third stage Of of EMU, but it was not maybe it was it was forgotten or not internalized by all governments or Parliaments at the international level and wages and prices are essential for country adjustments as they Directly impact on the real exchange rate and thus on a country's competitiveness in fact wages and prices are By definition the only remaining component of the real exchange rate and can be adjusted in the absence of nominal exchange rate flexibility so having Referred to the need for adjustment at the national level. I said that at the supranational level the Economic governance agreed In the master with the mastery treaty and later on with the stability in growth back have failed this economic governance has failed because it Never was fully applied. It was watered down in between 2003 and 2005 When in particular Germany and France insisted that the next step in the application of the stability in growth back Not to take place The result was the reform of the stability in growth back But the reform in the not in the right direction It thought it went totally in the wrong direction and there was at that point in time a political Attempt to destroy the fiscal roots, but we need fiscal rules because With monitor union. We have not engaged. We have not embarked in a fully fledged federation in Europe And as long this is the case part of the so-called political union must be fiscal roots and This was the idea why why why already in the mastery treaty fiscal rules were incorporated and More specified later on in with the stability and growth back. However, it has not worked now Lessons have been learned from this bad experience with an enhanced stability in growth back on the one hand and with a new Procedure, which is the macroeconomic surveillance Procedure in order to identify at an early stage emerging imbalances at the country level or And or at the European level So we see some progress here after the summer break there was an agreement reached between the European Commission the European Parliament and the The European Finance Minister's the so-called six pack. This is a big step forward in our view in the view of the ECP This is not far-reaching enough So we should draw firmer conclusions from this crisis and in this respect the so-called review clause which is part of the agreement between the three institutions and provides an important element and should enable further enhancements in economic governance and Contribute to a smoother functioning of economic and monetary union Now, let me conclude Times are likely to remain challenging for all of us the crisis is not over yet I will not make any forecast When it will be over I hope that the verse to be over in the let's say When I have left the office, but this is not this is not there's no casualty So maybe In two years from now Difficult to predict. I will not make any prediction in this respect. I said already over lunch that About half year ago. I was asked when it is over. I said, okay it seems as if the Most challenging time is over and it turned out to be wrong So this will be very this will again be very demanding times for all of us It will take time to overcome this crisis However, the crisis will have also medium to longer term Effects medium to longer term effects on economic activity on growth potential very likely on growth potential We have to reconsider. What is the growth model of the future after growth models in some countries with? characterized by Low interest rate persistently low interest rate and increasing indebtedness as this growth model has has failed and Leaving behind High fiscal burden for the next generation and maybe for a very long Period of time maybe for more than one generation And we also have to discuss the role of the financial sector in the future What is the role of the financial sector in the future in supporting the real economy? What is Evident and what is very likely is that economic shocks are a fact of life and countries should be prepared to deal with Them and this is all the more the case in a monetary union where the nominal exchange rate Is no longer available as an instrument of adjustment The challenge is that some euro area countries currently face underline the critical importance of strong adjustment mechanisms and the need to avoid macroeconomic imbalances and unsustainable fiscal policies this all underlines the responsibility of National economic policymakers and This brings me to a very important conclusion namely Stability begins at home and we all have to put our own house in order Before we give advice to others all in all strong economic adjustment mechanisms Not only help to absorb adverse shocks But they are also essential to reap the benefits of our single currency the euro. Thank you very much