vitor constancio : presentation of the ecb ’ s annual report 2011 to the european parliament introductory statement by mr vitor constancio, vice - president of the european central bank, to the european parliament ’ s committee on economic and monetary affairs, brussels, 25 april 2012. * * * madam chair, honourable members of the committee on economic and monetary affairs, it is a great pleasure to present to you the european central bank ’ s annual report for 2011 which forms a core part of our accountability towards the european parliament. i will first very briefly review the economic and monetary developments over the past year and explain our monetary policy decisions. i will then touch upon the current fiscal challenges in the euro area and progress made to reinforce the eu economic governance framework. finally, i would like to address issues related to financial stability and regulation, with which your committee deals extensively. before doing so, i should like to highlight an important event in 2011 : the enlargement of the euro area to a seventeenth member, estonia. there is no better way to demonstrate the pivotal role in the wider european integration process of the euro area, which is open to those countries and economies that are fully compliant with the entry criteria in a convincing and sustainable manner. economic and monetary developments in 2011 2011 continued to be an exceptional year, confronting the ecb again with rather challenging economic and financial conditions. in the earlier part of the year, the economic recovery in the euro area continued, supported by global growth and strengthening domestic demand. headline inflation rates rose significantly in early 2011 due to energy and commodity price increases, and the balance of risks to the inflation outlook shifted to the upside. to preserve price stability and retain inflation expectations in the euro area firmly anchored, the governing council raised the key ecb interest rates in april and july 2011 by 25 basis points on each occasion, after having kept them at very low levels for almost two years. as of mid - july, tensions in financial markets again intensified, fuelled mainly by market participants ’ concerns about the evolution of public finances in several euro area countries. the resulting tighter financial conditions and rapidly deteriorating economic confidence, together with lower global demand, dampened euro area economic activity in the second half of 2011. high financial market uncertainty together with deleveraging pressures on banks ’ balance sheets also affected money growth, which diminished towards the end of the year. in view of this, the governing council subsequently reduced the key ecb interest rates in november and december by a total of 50

smp programme in august 2011, the outcome of the meeting of the euro area heads of state or government on 9 december, which led to the adoption of the “ fiscal compact ”, and finally to the ecb decisions to reduce key interest rates and organize two 3 year long term refinancing operations. finally, progress has been accomplished to reinforce the economic governance framework of emu – both as regards crisis prevention and crisis resolution. the eu rules guiding the design and implementation of national fiscal policies have been strengthened as well as in the legal frameworks of member states. a new macroeconomic surveillance framework has been created. the new provisions included in the elements for eu fiscal governance framework are important steps in the right direction. however, the devil lies in the details of the implementation. most notably, the 2012 european semester should be used to enforce rigorously the reinforced fiscal and macroeconomic surveillance mechanism. the ecb will play a significant role in the crisis management framework. together with the commission and the imf, ecb staff will undertake a rigorous debt sustainability analysis of a member state requesting financial stability support in the context of the european stability mechanism ( esm ). the ecb will also be involved in the programme design and monitoring. efsf and esm interventions in the secondary bond market will be performed on the basis of an ecb analysis recognising the existence of exceptional financial market circumstances and risks to financial stability. the ecb welcomes the eurogroup ’ s recent decision to increase the total size of the euro area firewall to around 800 billion. however, let me be clear on one point : no firewall will be high enough to be a substitute for the required fiscal and structural adjustments in euro area member states. bis central bankers ’ speeches financial sector issues as regards the on - going financial regulatory reform, the eu has taken important steps in 2011. i would like to highlight three areas. let me start off with banking regulation. with the introduction of the crd iv / crr the european union will be among the first to implement the basel iii framework, a cornerstone development for strengthening financial stability. as the crd iv is advancing towards finalisation, i would mention that the ecb strongly supports the establishment of a single european rulebook for financial institutions – mitigating regulatory arbitrage and competitive distortions – which at the same time allows for flexibility at national level by member states to apply more stringent prudential requirements where systemic risks arise. to this