vitor constancio : catching - up strategies after the crisis keynote lecture by mr vitor constancio, vice - president of the european central bank, at the conference on european economic integration ( ceei ) 2010, vienna, 15 november 2010. * * * distinguished guests, ladies and gentlemen, it is a great pleasure to be here today to share some thoughts with you on the challenges to the process of european economic integration in the aftermath of the global turmoil. the financial crisis has exposed widely - held views on large domestic and external imbalances as having several shortcomings, which has led to an overall reassessment of the associated risks. with regard to the process of european economic integration, the financial crisis has undermined the staunch belief in a “ development model ”, whereby low income countries in central, eastern and south - eastern europe ( cesee ) could achieve rapid growth simply by : ( i ) engaging in market - oriented reforms ; ( ii ) liberalising trade ; ( iii ) having access to foreign capital markets via debt flows and foreign direct investment ( fdi ) ; and ( iv ) allowing the entry of foreign banks. the associated growing imbalances were judged as temporary phenomena associated with the catching - up process. i will argue today that this development model should not be abandoned, but refined, as the push towards market reform has engendered significant benefits. however, the global crisis has shown that economic convergence in europe should not be viewed as an automatic process. in fact, stability - oriented policies and careful risk management should accompany and support convergence efforts. with this in mind, i will focus on the following three aspects, which highlight the role of policy in ensuring a sustainable development model : 1. a review of the growth experienced in cesee countries in order to determine if any general lessons can be drawn. 2. the role of the foreign banking sector in cesee countries, which despite having been beneficial overall for the catching - up process, may have contributed to increasing domestic imbalances in some countries. 3. the establishment of a new macro - prudential and regulatory framework in the european union ( eu ). 1. the experience of growth in the cesee region before the global financial crisis erupted, the cesee region was experiencing an economic boom, with rapid gdp growth that could be attributed to domestic and international factors. the widespread and enduring process of convergence of living standards and prices towards euro area levels prompted considerable optimism about the future. market -

. why is this mechanism no longer working? as explained earlier, there are other reasons for the recent market movements. looking back over a longer period, the low interest rates have clearly given a boost to stock markets. how much longer will the period of low interest rates last? as long as needed. rates will have to stay low until we see that the inflation rate in the euro area is moving towards our objective of just below 2 %. we at the ecb don ’ t want this phase bis central bankers ’ speeches of low rates to become normality either. but we still have a pressing need for the low rates so as to get inflation firmly back to 2 % and to protect the euro area recovery. but we are a long way from 2 % inflation because of the low oil price. the ecb will have to lower its inflation forecast. our next staff inflation projections are due in march. already in january we said that inflation will only very slowly move back towards 2 %. compared with the situation in december we are seeing new downside risks. the main causes are the falling price of oil and a decline in global growth. in the past few days we have also seen greater volatility on the financial markets. if that continues for too long, it can also increase the risk of a rise in inflation being delayed. the continued low interest rates are unsettling savers, especially in germany. what ’ s your advice to savers? we have to get inflation to below, but close to, 2 % again ; that has been our definition of price stability for a long time. why are interest rates so low? because the return on capital has declined in the economy. to keep the low interest phase as short as possible we need more private investment as well as government policies which create the conditions for profitable projects to emerge. meanwhile we can help savers best by keeping policy interest rates low. do governments have to do more to protect savers from losses in the value of their assets, for instance by cutting taxes? our advice to euro area governments is to use the savings gained from the lower cost of debt refinancing in a growth - friendly way to help their citizens. they could, for example, reduce taxes on labour, create more incentives for private investment, or reduce their deficits where required. in many euro area countries the investment climate is too unfavourable. does the ecb need to become even more expansionary in order to prevent deflation? this