deteriorating. banks and governments were being forced to pay even higher interest rates. and credit and economic growth were then falling further, leading to rising unemployment and reduced consumption and investment. this situation posed serious risks not only for the countries concerned, but for the whole euro area. it was hindering the overall economic recovery. it was even damaging the single market, as healthy companies were being curtailed in financing solely because of their location. if this situation had been left unaddressed, it could have created a risk of deflation and threatened the ecb ’ s ability to ensure price stability. that is why we decided that action was essential. understanding the ecb ’ s response how did the ecb respond to this situation? in our analysis, a key reason why our low interest rates were not being passed on was that, earlier this year, some investors had become influenced by imagined scenarios of disaster. they were therefore charging very high interest rates to governments and private borrowers in countries they perceived to be most vulnerable. these interest rates went beyond levels warranted by economic fundamentals and justifiable risk premia. interest rates do not have to be identical across the euro area. but it is unacceptable if the reason for large differences is the fragmentation of capital markets caused by fears of a euro area break - up. it was clear to us that governments could not address these break - up fears alone. the only way to restore market confidence and the proper transmission of our monetary policy was a fully credible backstop against disaster scenarios. our new programme of outright monetary transactions provides this backstop by allowing for unlimited interventions in government bond markets. this commitment has generated a lot of debate. but we have to understand how markets work. our actions have to send a clear signal to markets that their fears about the euro area are baseless. it is important to stress that “ unlimited ” does not mean uncontrolled. most importantly, to qualify for interventions, countries must have agreed a european stability mechanism ( esm ) programme with strict conditionality and imf involvement. the ecb will only intervene if the policy conditions under that programme continue to be met. bis central bankers ’ speeches conditionality is very important. it ensures that countries continue to reform while the ecb is active. it provides a clear basis for us to terminate our operations if the programme is not complied with in full. and it also protects the ecb ’ s independence, as we will not be forced to substitute for a lack of actions

imf ) forecasts that the euro area ’ s primary budget will be almost in balance this year. by comparison, japan will have a primary deficit of 9 % of gdp, the united states 6. 5 % and the uk more than 5 %. we are also seeing some noteworthy improvements in competitiveness. price competitiveness has improved significantly in several euro area countries. and current account deficits are falling. for example, the countries under full eu - imf programmes have seen their unit labour costs improve by more than 10 % since 2008, relative to the euro area average. their current accounts have improved by around 8 % of gdp since then. governments have also taken measures to strengthen the rules and institutions that guide economic policies in the euro area. this is important to ensure that the positive developments do not simply reverse when economic conditions improve and markets stabilise. one notable example is the new fiscal compact, which will provide a strong tool for keeping budgets close to balance in the future. governments have also set up a new framework to prevent and correct unsustainable developments in the private sector. in short, some hard work has been done in the euro area to unwind imbalances and to reinforce governance. but there is still a lot more hard work to do. maintaining the current momentum of reform is essential for putting the euro area on the path back to stability. fragmentation in monetary policy transmission let me now turn to the measures being taken by the ecb. bis central bankers ’ speeches the confidence crisis and the process of adjustment across the euro area has weighed on short - term growth and dampened inflationary pressures. to maintain price stability, the ecb has lowered its interest rates to historically low levels. but before august this year, our low interest rates were not reaching companies and households evenly across the euro area. in some countries, interest rate reductions were being fully passed on. in others, lending rates barely declined. and in a few countries, they had actually risen. this divergence happened because banks in some countries had found it increasingly expensive to obtain funding from market sources. they therefore could not pass on the lower interest rates to their customers. this meant that monetary policy was unable to support the real economy in these countries. smaller companies were affected the most, as was clear from our surveys of smes. and as companies in the euro area are very dependent on bank loans for financing, some economies were being forced into a damaging cycle. economic activity was weakening. public finances were