dynamics of european integration. let me elaborate on some key features of the banking union – a project with which i am closely associated. the fragmentation of the banking system along national lines has posed a direct threat to the integrity of the single currency. we need to break the doom - loop between sovereigns and banks, restore the confidence of depositors and investors – in fact rebuild trust in the whole financial system – as well as ease the reintegration of financial markets. the banking union will help to restore the proper transmission of monetary policy and relieve the ecb of some of the tasks undertaken during the crisis. its importance and urgency cannot be overemphasised. the banking union comprises two main parts. one is the single supervisory mechanism ( ssm ), which is scheduled to start operating at the ecb in frankfurt, at the earliest 12 months after the adoption of the regulation. the second part is the single resolution mechanism ( srm ), which is a siamese twin. the ecb cannot exercise this task as it will undertake the analytical part of supervision. a separate authority is needed ; perhaps one that is attached to the esm, for the resolution task as it implies a distributional impact which belongs to the executive prerogative. still, close cooperation is warranted with the ssm and dg competition. what is also clear is that the resolution body needs to operate at the same level as the supervisor, i. e. the european level. this becomes even more obvious amid the potential need to deal with cross - border operating banks. the ssm will be a single supervisor for all banks established in the euro area, plus those banks established in the eu countries which have entered into a close cooperation with the ecb. so it will have a truly european focus. it should create a level playing field for the european banking industry and remove any national biases or supervisory forbearance, and prevent the hiding of bad assets – or even leniency – towards so - called “ national champions ”, a phenomenon that might have become more acute during the crisis. it is a myth that such champions were in the interests either of domestic economies or of national taxpayers. but the ssm will go well beyond that : it will result in the elimination of asset and liability matching on a national level that has done so much harm. how will the single supervisory mechanism function in practice? there will be a twotier system of banks. the banks considered to be systemically important, about

very weak. according to the survey data for the last two months, there are tentative signs of a stabilisation in economic activity at a low level. looking ahead, we expect the euro area economy to recover very gradually in the course of 2012. the very low short - term interest rates and all the measures taken to foster the proper functioning of the euro area financial sector are lending support to the euro area economy. moreover, stress in financial markets has diminished in response to our monetary policy measures, but also in response to the progress made towards a stronger euro area governance framework and intensified fiscal consolidation in several euro area countries. however, subdued global demand growth, the remaining tensions in euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non - financial sectors, continue to dampen the underlying growth momentum. this outlook is subject to downside risks. they notably relate to tensions in euro area debt markets and their potential spillover to the euro area real economy. downside risks also relate to possible adverse developments in the global economy, higher than assumed increases in commodity prices, protectionist pressures and the potential for a disorderly correction of global imbalances. bis central bankers ’ speeches euro area annual hicp inflation was 2. 7 % in january 2012, according to eurostat ’ s flash estimate, unchanged from december. the average inflation rate for 2011 was 2. 7 %, mainly driven by higher energy and other commodity prices. looking ahead, inflation is likely to stay above 2 % for several months to come, before declining to below 2 %. this pattern reflects the expectation that, in an environment of weak growth in the euro area and globally, underlying price pressures in the euro area should remain limited. risks to the medium - term outlook for price developments remain broadly balanced. on the upside, they relate to higher than assumed increases in indirect taxes and administered prices, as well as increases in commodity prices. the main downside risks relate to the impact of weaker than expected growth in the euro area and globally. the monetary analysis indicates that the underlying pace of monetary expansion remains subdued. the annual growth rate of m3 decreased to 1. 6 % in december 2011, after 2. 0 % in november, reflecting a further weakening of monetary dynamics towards the end of the year. the annual growth rates of loans to non - financial corporations and loans to households, adjusted for loan sales and securitisation, also decreased further in december, and