price developments. inflation in the euro area has declined rapidly since it reached its highest level in over a decade in the summer of last year. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 1. 2 % in february 2009, well below the rate of 4. 0 % registered in july 2008. this decline primarily reflects the marked fall in global commodity prices, and in particular oil prices, over this period, owing mainly to weak global demand. the fall in commodity prices has also contributed to a significant diminishing of supply chain pressures from very high levels as signalled by strong falls in survey measures on price setting indicators of companies and substantial declines in producer prices at early production stages. looking ahead, hicp inflation is expected to fall further in the coming months. this mainly reflects a rather technical effect which is called “ base effect ”. base effects are important when looking at developments in annual inflation rates, i. e. comparing the price level now with the one registered a year ago. the increases in energy and food prices, which led to the extended inflation hump until mid - last year, will subsequently drop out of the year - on - year comparison in the coming months. these base effects will exert significant downward pressure on overall inflation and there is a high likelihood that in this process of ongoing disinflation annual hicp inflation in the euro area will temporarily turn negative in the middle of 2009. it also cannot be excluded that we will see in some euro area countries negative inflation rates for a more extended period of time. however, this will mark most probably only a trough in inflation. the same factors pushing down inflation in the first half of 2009, namely base effects related to volatile oil and food prices, will subsequently unwind and actually put upward pressure on prices, contributing to rising inflation rates over the course of the second half of 2009. overall, the ongoing disinflation process in the euro area is expected to imply sharp fluctuations in hicp inflation rates during 2009 as also foreseen by the ecb staff projections. for 2010, the ecb staff project hicp inflation at moderate rates. let me emphasise that sharp fluctuations in annual inflation rates or the temporary emergence of negative inflation rates is a normal concomitant of any disinflation process, which by its very nature is temporary and thus should not be confused with another “ d ” - word, namely deflation. from a conceptual point of view, deflation is

is no surprise that most of the countries with the largest deficits and the largest increase in debt after the crisis have been those in which the financial sector played an increasing role, also as a source of fiscal revenue. as the financial industry becomes less profitable, and provides less tax revenue, the gap has to be filled by other sources of taxation, or lower public expenditures, which may be politically difficult to accept. these aspects may not have been fully incorporated in the projections for the adjustment of public finances in many advanced economies, unless it is expected that the financial sector will return to its pre - crisis peak, which is a risky assumption. more generally, this crisis has shown the vulnerability of public finances to volatile structures in the economy. in good times, volatile sources of income, such as those from the financial sector or the housing market, may overestimate the soundness of public finances, while the adjustment costs in the downturn may be enormous. a case in point is that of ireland, which during the pre - crisis years was able to reduce taxes and increase expenditures for an amount of about 12 % of gdp ( in the period 2003 – 2008 ), thanks to the rise in revenues from the financial sector and from housing. the comparatively large size of these two sectors made irish public finances vulnerable to the bust of the cycle, leaving personal income tax as the shock absorber until the economy recovers. interestingly, the fiscal package that is included in the irish adjustment programme with the imf is of a comparable magnitude to the pre - crisis fiscal expansion. surveillance has clearly failed to understand this phenomenon. more attention needs to be paid to the overall size and interconnectedness of the financial sector as a whole in the various countries, and to the ability of these countries to absorb shocks affecting not only a single financial institution but the whole financial system. it is now fashionable to stress - test the banks. it would probably be appropriate to stress - test countries as well. bis central bankers ’ speeches conclusions let me conclude by suggesting that surveillance of the world economy, in particular some of its systemically relevant members, has to focus more on the sustainability of their policies, in particular their fiscal and monetary policies. some policies may appear to be sustainable on the basis of assumptions which may turn out to be simplistic, especially those relating to long - term trends of growth and inflation. in particular they may not take sufficiently into consideration the impact of broader developments under way in the global economy. as keynes said