interests. in the euro area generally, the public debate is mostly supportive of the rationale for fiscal consolidation. some have asked why i see fiscal consolidation as a positive trend for the euro area. the well known counter - argument is that consolidation risks dampening the prospects for growth. but i believe that fiscal consolidation is not only positive, but essential – for three reasons. first, experience suggests that the short - term costs of fiscal consolidation can be contained if the consolidation strategy is effectively designed and includes a comprehensive programme of structural reforms. conversely, the long - term costs of not consolidating can be non - linear and unpredictable. second, the excessive level of fiscal imbalances in many euro area countries puts them in “ uncharted waters ”, where they can be vulnerable to a rapid deterioration of confidence among firms, households and investors. this makes consolidation imperative. third, we are still in uncertain economic times, and it is important that governments retain the capacity to intervene in the face of possible future adverse events, including unforeseeable circumstances such as natural disasters, which can have a significant fiscal dimension. this requires sound public finances and specific strategies tailored to national circumstances. a new framework of economic governance the other trend that is encouraging for the euro area, but where there is still a great deal of hard work before us, is the review of the economic governance framework. the european commission and the task force chaired by the president of the european council, mr van rompuy, have been very active in this area. the commission has come forward with proposals to strengthen economic governance, published on 29 september. a number of these proposals go in the right direction and address some important gaps in the existing governance framework. but let me lay out what i believe to be critical points in the implementation of a new framework. what we need is a fundamental strengthening of economic governance in the euro area. economic and monetary union rests on two pillars, the economic pillar and the monetary pillar. the monetary pillar is firmly established and the ecb has fully delivered on its mandate to maintain price stability at below and close to 2 %, over the medium term. over the first 11½ years of the euro, the average annual inflation rate has been 1. 97 %. what is more, inflation expectations are firmly anchored in line with our mandate. in contrast, the economic pillar of our union remains under construction and there is much work to do. one key area is surveillance of fiscal policies to prevent excessive deficit

let me be clear that the exchange rate is not a policy target, but it is important for growth and price stability. another sign of improved confidence is the larger than expected early repayment by counterparties in the first of our two three - year longer - term refinancing operations settled in december 2011 and march 2012. this indicates that banks are less uncertain about their bis central bankers ’ speeches funding prospects than a year ago. we will closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provision. the risks surrounding the economic outlook for the euro area continue to be on the downside. they relate to the possibility of weaker than expected domestic demand and exports, slow implementation of structural reforms in the euro area, as well as geopolitical issues and imbalances in major industrialised countries which could both have an impact on developments in global commodities and financial markets. these factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery. annual inflation in the euro area has continued to moderate, falling from 2. 5 % in october to 2. 2 % in november and december and 2. 0 % in january, as we had foreseen. inflation is expected to decline to below 2 % in the near term. risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate. inflation expectations for the euro area remain firmly in line with the governing council ’ s aim of maintaining annual inflation rates below, but close to, 2 %. our monetary analysis is consistent with price stability. the underlying pace of monetary expansion and loan dynamics remain subdued. the annual growth rate of loans to the private sector remains negative. to a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the continuing process of deleveraging. overall, inflationary pressures should remain contained over the policy - relevant horizon. taking the evidence together, this allows our monetary policy stance to remain accommodative. the impact of a low interest rate environment let me turn to the first topic that you have chosen for our meeting today, namely the implications of a low interest rate environment. the impact of