gertrude tumpel - gugerell : the euro area ’ s economic outlook intervention by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, during a panel discussion on europe ’ s financial forecast at the bloomberg businessweek european leadership forum, london, 23 november 2010. * * * ladies and gentlemen, it is a pleasure to attend this year ’ s bloomberg businessweek european leadership forum. bloomberg ’ s and europe ’ s economy have at least one thing in common. coincidently, bloomberg was founded in 1981 and so was the ecu, the european currency unit, one of the forefathers of our common currency, the euro. so let me take the opportunity, today, to speak about the state of the euro area economy. when assessing the euro area economic outlook, three criteria are of particular relevance in the current juncture. first, how much does the euro area banking sector still rely on central bank liquidity support measures? and second, can we be confident that private sector domestic demand can contribute to a sustained economic recovery? and third, what are the implications for price stability against this background? in what i will present to you i will argue that there are some good news when assessing these two questions. first, money market activity in the euro area improved which has allowed the ecb to withdraw some of the liquidity support. second, household incomes and non - financial corporations ’ balance sheets are improving supporting a positive outlook on euro area growth, also against the background of further consolidation efforts of euro area governments. and third, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households, also as inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2 % over the medium term. so let me assess the euro area financial and economic outlook in a bit more detail. part i : assessing the euro area financial and economic outlook reduction of central bank intermediation … the size of refinancing operations has decreased considerably since 30 june 2010, from €881 billion on that date to €510 billion in mid - november. the phasing - out of non - standard measures continued in the third quarter of 2010, and is still continuing in the fourth quarter, as all maturing one - year and six - month longer - term refinancing operations ( ltros ) are not being renewed. … as money markets

participants who bet on the failure of countries to use part of their future earnings to convince people that there is no other way possible, that an “ orderly ” failure that puts public finances back on track is better. the more people who are convinced of it ( “ as greece is going to fail, help is useless ” ), the more likely becomes the outcome desired by financial market participants, although it is not in the general interest. these issues raise ethical and moral questions that have been widely discussed, but from a limited point of view. the appeal to ethics and individual morality is an important starting point to correct the distortions that i mentioned above. but it ’ s not enough. the experience of recent years has shown that self - regulation and self - discipline do not suffice to prevent market distortions. this stems from the fact that the measure of individual performance, which is the economic result, can be appropriate in a theoretical context of perfect and complete information, particularly about how that result was obtained. financial markets are, however, characterised by information asymmetries that make it very difficult to identify the source of profit, especially if it has been achieved thanks to the ability of the individual market participant ( known in the jargon as alpha ) or due to the risk it has taken and that may be improperly measured, precisely because of the informational asymmetries in the financial services available to the client. other financial market participants and supervisory authorities are not always able to adequately identify the relative contribution of the two factors and therefore to punish unethical behaviour. 7 however, not all unethical behaviour which shows a conflict of interest is directly punishable. in some cases it is considered that the reputational loss of the market participant who fails to live up to ethical principles is a sufficient incentive to ensure fairness. but if the gain more than compensates for the loss of reputation, the incentive to continue to violate the ethical principle remains, perhaps in a more effective manner. if the unethical practices make it possible to obtain higher returns, those who do not follow them are likely to be penalised. in other words, those who comply with the dictates of ethics may not perform economically so well as those who do not, and so may find themselves out of the market. 8 self - regulation works if everyone respects the rules and if that compliance is easy to monitor. since the financial market information asymmetries make it very difficult to distinguish between those who observe the