adverse economic shocks, the monetary policy of the eurosystem has been effective in keeping both inflation and deflation at bay, thus securing the value of the euro. measured in terms of the harmonised index of consumer prices ( hicp ), the euro area inflation rate was on average slightly below 2 % between 1999 and 2010, which was in line with the eurosystem ’ s definition of price stability. thus, inflation in the euro area countries was 0. 4 percentage points lower than in the seven years before the introduction of the euro. as exchange rate fluctuations no longer existed within the euro area, trading costs declined not only between euro area countries but also between the euro area and its major trading partners. this promoted the exchange of goods and services and contributed to economic growth. the euro and the single monetary policy of the euro area proved to be a shelter during the financial crisis. rapid action and flexible provision of central bank liquidity secured the functioning of the banking sector and of payment systems in europe even at the height of the financial market tensions. moreover, years of strengthened economic policy coordination within the euro area facilitated joint action to safeguard the stability of the financial system and to reform the european system of supervision. after all, during financial storms it is better to be in a large ship than in a small vessel. the common currency does, however, not come without costs. within a monetary union, where monetary and exchange rate policies are no longer the responsibility of national governments, a high level of coordination between fiscal and structural policies and a forward - looking approach are essential to ensure that national policies do not interfere with the common monetary policy. the interest rate decline in the countries at the periphery of the european union was an important factor for their impressive catching - up process, but also the source of mounting internal and external imbalances. unsustainable labor cost developments and widening external deficits are clear indicators of losses in competitiveness. housing price booms and excessive credit growth signal asset price bubbles that harbor the risk of sudden trend reversals. at the european level we can support countries by giving advice and – if necessary – by executing peer pressure and providing incentives for adequate policies. we also continue to strengthen the supervisory powers of european institutions under the enhanced stability and growth pact. since the introduction of the euro, many economists have argued that any monetary union faces the risk that the economic developments of some of its members diverge, even if an adequate mix of national policy measures is applied. they have bis

. this development proved to be the catalyst for the rally in financial markets. furthermore, the pace and speed of the recovery, differed vastly across countries and regions, with emerging markets proving to be the engine for global growth. together with record - low interest rates in advanced economies, risk aversion having dissipated and abundant liquidity, emerging market countries started to attract significant capital inflows. however, towards the end of 2009, some headwinds emerged, which more recently intensified with the sovereign debt crisis in southern europe and with markets becoming particularly concerned about a possible default by greece and the contagion effects thereof. was this to be the start of a new crisis? was the nascent global economic recovery now at risk? was the confidence we saw in financial markets misplaced and needed to be replaced by renewed risk aversion? the initial comfort provided by the eur750 billion rescue package announced in early may by the european union ( eu ), imf and european central bank ( ecb ), soon gave way to concerns and uncertainty as to whether the measures taken would be sufficient to resolve the underlying solvency problems and whether the required fiscal consolidations would be politically and socially feasible. budget cuts imposed across the euro zone spurred debate about the sustainability of the euro, the ramifications of fiscal tightening on european economic growth and the impact of a slowdown in the euro zone demand on the overall global recovery. speculative currency positioning now showed aversion towards the eur instead of the usd. the net long eur contracts changed to net short positions of almost 120 000 contracts. over the same period, the eur depreciated to usd1, 21 in mid - may. risk aversion subsequently increased and the vix index spiked to over 40 points in may 2010. equity markets lost ground and cds spreads, most particularly for portugal, ireland, greece and spain, increased. strains in the money market came to the fore once more and the us ois spread ticked up from around 10 basis points to approximately 30 basis points. central banks that had been slowly and carefully embarking on exit strategies from unconventional policies, found themselves pondering about and indeed implementing re - entry strategies. it is clear that there is an urgent need for countries to consolidate their fiscal positions and bring their public debt ratios and fiscal deficits back to within more sustainable parameters. domestic financial markets these developments are important for south africa, being a small and open economy with deep and liquid financial markets.