area was inflation. through a gradual stabilisation of the exchange rate, disinflationary interest rate and fiscal policies, and the abandonment of wage and contract indexation, we managed to bring inflation down from almost 10 % in 2000 to just above 2 % in 2006. interest rates had also fallen substantially. this brings us to the second important point. conditions for borrowing of government and banks on international markets and credit conditions for business and households have improved significantly. we could observe something similar in croatia in previous years. these favourable developments also bring risks. better access to international financial markets has contributed to a strong credit expansion in slovenia, which was also supported by the strong growth of domestic construction sector, financing of corporate acquisitions and global economic upturn. following the global financial crisis and the drying up of liquidity in the interbank market, our banking system found itself in difficulties. the circumstances surrounding croatia's adoption of the euro are also a challenge of their own. however, bank regulation and supervision have been substantially upgraded in the last decade. macro - prudential policy tools are also more developed these days. ( iii ) the third important issue is the macroeconomic effects of the euro. given the proximity of eu accession and the adoption of the euro in slovenia, the effects of these two events are intertwined. that period of euro adoption was marked also by a strong global economic upturn, which was reflected in rising prices. croatia's adoption of the euro took place in an economically and geopolitically turbulent environment, at a time of the highest inflation in advanced economies in the last four decades. the confluence of different factors complicates the assessment of the impacts of euro adoption. 2 / 3 bis - central bankers'speeches in generally, adoption of the euro by a small economy brings higher price transparency and competition, lowers transaction and borrowing costs, reduces currency risks and makes it easier for domestic firms to do business in foreign markets. in both countries, the introduction of the euro was accompanied by concerns about price increases. analysis for slovenia shows that consumer prices increased by around 0. 3 percentage points in the first months after the introduction of the euro. price rounding was an important contributing factor. this may not be consistent with people's perception. a marked increase in the prices of goods with a lower nominal value that we consume on a daily basis can give the impression of an overall price increase. the so - called » espresso effect « has also been observed in croatia in

from accounting to improving legal certainty, and management of countries ’ external balance sheets. decision making about priorities is particularly challenging because we cannot be clear ex - ante how well the mitigation techniques will work, and we often need to rely on others to implement them. in addition we need to ask whether we are the right party to act. we also need to think about the relevance of our activities to our mandate – or “ must dos ”. in some areas, for example payment systems – one of our “ must dos ” – it is clear that we have a responsibility to reduce risks. in this case the questions we need to answer relate to the degree, methods and resource implications. but in other areas whether we should act is less clear cut. what particular contributions can we make and are there any areas where we can sensibly act alone? we need to ascertain areas where we can achieve results both domestically with hmt and fsa, and internationally with organisations such as the basel committee, the committee on payment and settlement systems and the financial stability forum. perhaps i can mention one area to which the challenge process suggests we should devote considerable resources – global institutional liquidity. as i have said before this is an area of potential vulnerability that has developed alongside the rapid globalisation of markets and of firms operating within them. i personally feel that it has been somewhat overshadowed in recent times by work in other areas such as capital adequacy. we feel that we can make a particular contribution here – both owing to our position in such a major global financial centre and because, in sterling at least, we are a potential provider of liquidity. so we justify devoting significant resources to the analysis of liquidity issues, and the development of potential risk reduction strategies for liquidity problems – nationally and in particular internationally. at the other extreme, whilst we feel strongly about the desirability of robust and widely applied accounting standards – and are prepared to express our views on the big picture aspects of this from time to time – we do not devote significant resource to analysis, or lobbying in this area. c ) preparation for a financial crisis and finally, tail event territory though it may be, we need to undertake preparation for financial crises. we need to think forward to being “ in - event ” where instability has actually been triggered, whether by a business failure of a firm or firms or by a terrorist or other disruptive event. we need to prepare now, in advance, to enhance predict