an important contribution to reviving europe and making it flourish again. one challenge along the way is that of gaining a more comprehensive understanding of the financial cycle – which is the topic of our conference. the global financial crisis and subsequently the sovereign debt crisis have ( once again ) strongly highlighted the key role financial developments play for economic activity and, at the same time, the necessity to review our understanding of the finance - growth nexus. let me briefly spell out what i mean by that. prior to the crisis, most economists believed that financial deepening strengthens long - term growth as it improves the allocation of resources by facilitating the collection of information, the monitoring of projects, the trading, diversifying and managing of risks, the mobilization and pooling of capital and, finally, the exchange of goods and services within the economy. 1 consequently, most observers did not consider the strong growth of private sector credit and house prices in several euro area economies ( like e. g. spain or ireland ) prior to the global financial crisis to be overly problematic but were of the opinion that it was – at least largely – sustainable. in a similar vein, the credit boom in cesee ( which started around 2003 ) and the substantial increase in house prices in many cesee economies before the global financial crisis were conceived as part and parcel of the catching - up process these economies went through – at least during the first years of the boom. given the low starting levels of credit - to - gdp ratios and of house prices in the early phases of the transition process ( as compared with fundamentals ), there was general agreement that there was a need – and indeed room – for further financial deepening in cesee. aptly reflecting these considerations, the ceei 2005, for example, dealt with the topic of “ financial development, integration and stability. ” while most of the contributions at the time emphasized the considerable potential for further financial deepening in cesee, which would increase growth and foster economic convergence in the region, several discussants aired concerns that rapid credit growth and soaring house prices, if they continued unchecked, could breed instability further down the road. oenb research at the time suggested that credit - to - gdp levels had surpassed equilibrium values ( as given by fundamentals ) in some, but not in all, cesee countries by 2005 / 06 – while the credit boom went on until late 2007 in the baltic countries and until the fall of 2008 in most other cesee economies. however, the tendency

strategy of tight inflation targeting is both a necessary and sufficient condition to ensure a benign combination of low inflation and high real economic growth. this combination had indeed been achieved in the first years of the new century. but as we now know, this positive outcome was the result of very specific circumstances, especially strong first - round globalization effects. thus, central banks were not well prepared for the upcoming financial and economic tsunami. this also holds true for the ecb, which in the summer of 2008 still raised interest rates. but when the tsunami arrived, central banks, including the ecb, reacted fast and forcefully and thus prevented a world - wide crisis of the dimensions of the great depression of the 1930s. looking at these developments from a european perspective, it is fair to say that without the ecb, the impact on europe of the world - wide crisis and especially of the de facto breakdown of money markets for a time would have been much stronger and indeed catastrophic not only for the member states of emu, but for all of europe. no national central bank, not even the central bank of a large country, would have been able to provide banks in liberalized capital markets with as much crucially needed liquidity as fast as the ecb. and only the big central banks like the ecb, the fed, the bank of japan and the swiss national bank were able to form the strong network of swap agreements that proved of utmost importance for the banking industry and that now is one of the most important permanent institutional innovations. all these innovations, by the way, benefited not only the banks – and thus the economies – of the euro area, but in an indirect way also the countries in which euro area banks are active, such as hungary ( nowotny, 2010 ). it is only this year that the euro area is expected to move out of recession to a constellation of positive, albeit still very weak, growth, and we still see substantial differences in the economic performance of various emu member countries – and also of neighboring countries. the main efforts both in europe and across the world are now moving from crisis fighting to long - term crisis prevention. two main approaches are being implemented : the first approach is to adjust the structures of the banking industry by implementing the basel iii process and the european banking union project. christian noyer, who plays a key role in both areas, will talk about this. the second approach is to adjust public finances. as i have shown before, the founding fathers of emu