10 - year bunds fell by less than 7 basis points. since then those rates have risen by about 2 basis points. the current low level of interest rates on long - term bunds is largely explained by investors that have sought safe assets in the context of sovereign debt tensions in the euro area. a third concern about low interest rates is that they undermine incentives for reform in the euro area. it is true that monetary policy decisions can have side effects – i mentioned a positive side effect earlier. yet we act for the euro area as a whole in line with our mandate, not for individual countries. if there is concern about reform incentives, we need to ask whether the framework of economic governance is being sufficiently enforced, and if not, what could be done to strengthen it. after all, ensuring sound fiscal and economic policies is ultimately the task of political authorities, not monetary authorities. economic policy in the same vein, we know that monetary policy alone cannot create a sustainable recovery. restarting growth ultimately depends on governments, business leaders and social partners working together. governments need to create the conditions that allow entrepreneurs to generate growth. there is no short cut to growth through debt. growth ultimately has to come from increasing the productive capacity of the economy – that is, through raising competitiveness and productivity. this country presents a good example of how to build solid foundations for growth. germany has competitive and innovative firms that are embedded in global value chains, notably the mittelstand. the country has enacted labour market reforms that have helped maintain price competitiveness, and that limit the impact of economic downturns on the young. and it has done this while working in cooperation with social partners, who understand that business models have to adapt to a globalised economy. in short, germany has oriented itself in a direction that in my view would benefit all euro area countries : being forward - looking, open to the world and focused on competitiveness and productivity. bis central bankers ’ speeches abraham lincoln famously said that “ you cannot make the weak stronger by making the strong weaker ”. similarly, the answer to the problems of the euro area is not to weaken its stronger economies. rather, it is to strengthen its weaker economies. and in fact, this is what we are seeing in the euro area today. most countries that lost competitiveness are regaining it. they are converging towards the most competitive countries, not vice versa. they have learned the fundamental lesson – for which germany is the model – that in a monetary union

any framework. meyer ( 2001 ) draws a distinction between a hierarchical mandate, which subordinates other objectives to the price stability objective, and a dual mandate, which places price stability and employment objectives on equal footing. like meyer, i prefer the dual mandate formulation and find it to be fully consistent with inflation targeting. formally, the dual mandate can be represented by a central bank loss function that includes both inflation and unemployment ( or the output gap ) symmetrically. here is part of a verbal reply that i made to a commenter on a paper about inflation targeting and asset prices that mark gertler and i presented at the fed ’ s jackson hole conference in august 1999, as published in the conference volume : “ i want to correct the impression... that mark and i are somehow against lender - of - last - resort activities, which is absolutely wrong. i have studied the depression quite a bit in my career, and i think there are two distinguishing mistakes that the federal reserve made. the first was to allow a serious deflation, which an inflation targeting regime would not have permitted. and the second was to allow the financial system to collapse, and i absolutely agree with, for example, what happened in october 1987 and other interventions... one advantage of the inflation targeting approach as opposed, for example, to a currency board, is [ that ] it gives you considerably more scope for lender - of - last - resort activities. ” ( federal reserve bank of kansas city, 1999, p. 145 ) bernanke ( 2003 ). gramlich ( 2000 ) made a similar observation and cited empirical evidence. particular, through two decades of effort the fed has restored its credibility for maintaining low and stable inflation, which - - as theory suggests - - has had the important benefit of increasing the institution's ability to respond to shocks to the real economy. the acid test occurred in 2001, when the fomc cut interest rates by nearly 500 basis points without any apparent adverse effect on inflation expectations. given the fed's strong performance in recent years, would there be any gains in moving further down the road toward inflation targeting? the most heated debates are said to occur on questions that are inherently impossible to prove either way, and i am afraid that this question gives rise to one of those debates, involving as it does counterfactual futures. personally, though, i believe that u. s. monetary policy would be better in the long run if the fed chose to make