in other words, europeans seem to have forgotten what the european union is about ( assuming they knew it in the first place ). the second symptom, derived from amnesia, is lack of consistency, which induces to create a link between facts and events that occur at the same time but which in fact are unrelated. the third symptom is myopia, which gives people a distorted view of the world around them, and thus the impression that nothing changes over time. the fourth symptom is denial, in particular concerning people ’ s own vitality. * * * let me start with the first symptom : amnesia. people tend to forget what the european union is all about. it ’ s not even clear they ever knew enough about it. this is a long - standing problem and has never really been tackled. the fact of the matter is that our citizens have little idea of what the eu is and how it functions. this lack of awareness can easily be exploited, and indeed has been exploited, to paint a distorted picture of the union. loosely speaking, cognitive dissonance is the uncomfortable feeling or stress caused by holding two contradictory ideas at the same time. the theory of cognitive dissonance proposes that people have a drive to reduce this dissonance by modifying an existing belief, or rejecting one of the contradictory ideas. this can lead to confirmation bias and denial of discomforting evidence. the picture that people have of the eu shows the member states and the union almost as opposing forces, rather than the former coming together to make up the latter. when the union takes a decision, it somehow looks as if it was a third entity – “ brussels ” – who took it, rather than representatives of the member states. in fact, the main decision - making body in the eu is the council, which comprises representatives of the member states, elected at the national level. the same can be said about the parliament, directly elected by the people. and also the commission consists of persons appointed by the governments of the member states. when the union takes a decision, it is in fact the member states which take it, through procedures established by the union involving factors such as voting modalities and specific majority thresholds. when the union fails to take a decision, it is ultimately the member states which fail to do so, either because they don ’ t want to or because they don ’ t gain majority support for a proposal. the union is often accused of excessive regulation

though a single currency implies a single exchange rate, the euro area representatives in the imf executive board do not always sing from the same hymn sheet when discussing exchange rate developments in other major countries. it is my conviction that a unified representation of the euro area countries at the imf would strengthen the exchange rate policy of the euro. exchange rate developments during the crisis let me now turn briefly to exchange rate developments since the outbreak of financial turbulence in the summer of 2007. during the last year and a half, foreign exchange markets have witnessed sharp swings in all major bilateral rates. foreign exchange volatility – both realised and implied – has reached historical levels ( see fig. 1 ). more recently, the situation seems to have improved as realised volatility eased substantially. yet the markets ’ perception of risk still remains elevated compared with longer term averages. 2 despite the extremely volatile environment, the spot foreign exchange market seems to be functioning normally. looking at the euro / dollar bilateral rate, bid - ask spreads ( expressed as percentages of the spot rate ) have remained largely unaffected by the rise in realised and analysing options ’ maturities ( see fig. 2 for the euro / dollar rate ) reveals that the increase in the perception of risk was concentrated over the shorter horizons ( one to six months ), while it remained more contained at the one - year horizon. since the beginning of 2009, shorter - term expectations of exchange rate volatility have been significantly scaled down, signalling a return to ‘ normal ’ market conditions. implied volatilities ( see fig. 3 ), and broadly in line with their averages since 2004. nonetheless, some tensions have emerged in the forward foreign exchange market. the us dollar funding needs have led to tensions in global money markets 3 and forced many institutions to convert euros into dollars through fx swaps. in addition, tensions have not remained confined to the shortest horizons, but also spread to longer maturities, as banks have realised that the financial crisis might last longer than anticipated. 4 turning to exchange rate movements, until the summer of 2008, the us dollar weakened against the euro, while the japanese yen remained broadly stable. this reflected the market perception that the turbulence originated in the united states ( see fig. 4 ). subsequently however, and especially after the lehman collapse, the euro weakened both against the us dollar and the japanese yen. the dollar benefited from increasing risk aversion worldwide as well as from temporary factors associated with a widespread shortage of dollar liquidity