If quality of institutions is proxied by the World Bank's Worldwide Governance Indicator (which includes six broad dimensions of governance: Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption, Voice and Accountability, and Political Stability and Absence of Violence/Terrorism), there has hardly been any convergence of the CEE region towards Germany. Notable exception are the Baltic countries where we have seen positive developments also in the aftermath of the global financial crisis. A very similar conclusion can be drawn when looking at the human capital quality, not only that the CESEE countries lag substantially behind the EU countries that achieve the best results in PISA tests in Math and Science (Finland, Sweden, Austria, and Germany), but the developments over time are also not encouraging as in many countries the results actually worsened during the last decade. So, one can raise the question of how did we manage to  6  converge at a relatively high pace before the crisis, or why convergence continues, with such institutions and human capital? On one side, such developments are worrisome, but, on the other, they give us the opportunity to streamline reforms. Gains from reforms can be substantial. The European Commission estimated that structural reforms that close only half the gap with best performers in different areas (market competition and regulation, R&D expenditure, skill structure, tax structure, labour market participation, unemployment benefit ‘generosity’ and active labour market policies), which is not overambitious, could have significant macroeconomic effects.

We continue to expect growth of 1.0–1.5% for the year 2013 as a whole. Consequently, we do not expect that the Swiss economy will return to full utilisation of production capacity in the near future. Monetary and financial conditions I will now turn to monetary and financial conditions. In recent weeks, volatility in financial markets has again increased. Since the last monetary policy assessment, however, the export-weighted external value of the Swiss franc has remained largely unchanged. Recent developments suggest that safe-haven considerations continue to play an important role in the demand for Swiss francs. Overall, the value of the Swiss franc remains high and should fall further over the next few quarters. The level of interest rates in Switzerland remained very low in the first quarter. On the secured Swiss franc money market, interest rates are in negative territory. Yields at issue for Confederation money market debt register claims also continue to be negative. By contrast, yields on ten-year Confederation bonds have risen slightly from the lows reached last December. Movements in long-term interest rates show that demand for secure investments  2  BIS central bankers’ speeches  reacts strongly to the international environment. My colleague, Fritz Zurbrügg, will talk about developments on financial markets in more detail afterwards. Banks’ sight deposits at the SNB have not increased any further since September 2012. However, growth in the M1, M2 and M3 monetary aggregates, which measure the amount of money held by households and companies, remained strong.