peter praet : economic adjustment in the euro area speech by mr peter praet, member of the executive board of the european central bank, at the institutional money congress 2013, frankfurt am main, 27 february 2013. * * * i would like to thank arthur saint - guilhem, melanie ward - warmedinger and niels bunemann for their contribution to the preparation of this speech. ladies and gentlemen, introduction thank you for inviting me to share some thoughts with you on what has been achieved and what remains to be done in the process of addressing the economic challenges we are faced with in the euro area. i will give you a central banker ’ s view on the role of monetary policy in managing the current crisis, but i will also extend my discourse to cover the broader institutional landscape, including some thoughts on what policy - makers in other fields than monetary policy could contribute to improve the euro area ’ s resilience. today, i will focus on three points : first, the european central bank – together with the national central banks of the eurosystem – has acted forcefully within its mandate, in order to counteract any risks to price stability stemming from the crisis. the ecb ’ s monetary policy during the crisis has invoked both standard instruments such as interest rate changes and non - standard instruments to ensure that the standard instruments would have the intended effects. second, the most distressed countries within the euro area have embarked on a correction of their policies. this correction is painful and requires perseverance of all responsible parties. the reward should be positive results that are now in fact tentatively observable. third, governance reforms at the level of the euro area and the european union at large have contributed to an improvement of the foundation for a better performance in future, and this work is still in progress. the multi - layered crisis when looking at the crisis as it has developed since 2007, it can be helpful to use the metaphor of an iceberg. in each phase of the crisis we have discovered new layers, from the visible tip of the iceberg to the dangerous ice cliffs that linger under the surface – and which, in the economic context, have emerged in the subsequent phases, each time proving to be larger than previously thought. this has challenged policy - makers to acknowledge the real dimensions of the problems, and to adjust their response accordingly. the tip of the iceberg – the liquidity crisis – was revealed in mid - 2007 when the us mortgage market, which lay at the basis

– due to sovereign immunity – are not. we therefore need a super - national structure which guarantees that, should an omt be bis central bankers ’ speeches activated, government solvency – fiscal sustainability and macroeconomic viability – is in place and sufficiently constraining – national policies. this is why we need programme conditionality and multilateral surveillance as a precondition to initiate omt. moreover, the design of omts entails interventions only in the short end of the government bond market – up to three years ’ time to maturity – and they will be fully sterilised, meaning that we would absorb all amounts of liquidity injected by omts. early results of economic adjustment now i will turn to the “ green shoots ” of a nascent recovery that can already be observed. almost six years down the road since the start of the financial turmoil that turned into a crisis, many euro area countries have experienced a significant, but to date still partial, correction of external and domestic imbalances. substantial progress can be seen most clearly in the development of current account balances. in the programme countries – greece, ireland and portugal – current account balances have improved by more than 7 percentage points ( relative to gdp ) between 2008 and 2012. in spain the current account has improved even more dramatically. much of this was driven by an inevitable drop in domestic demand, but we have also seen strengthening exports in a global environment that is not really buoyant. this indicates that the countries ’ efforts to rebalance their economies are starting to bear fruits. part of this picture is also the partial reversal of previous losses of competitiveness, but here the pace of progress varies across countries. ireland has performed very well, with accumulated unit labour costs falling by 18 percentage points relative to the euro area average. greece, portugal and spain have seen a 10 percentage point relative improvement so far. in some other countries in need of strengthening competitiveness we are still waiting for the correction to become apparent. and in yet other countries, notably some of the countries that joined the euro area more recently, we have actually seen an incipient loss of competitiveness. it is important that these countries take a lesson from the mistakes of others. fiscal balances have shown strong improvements. for example, greece ’ s structural primary balance ( that is, the fiscal balance adjusted for cyclical developments, interest payments and one - off factors ) is estimated by the commission to have improved by more than 13 percentage points. i acknowledge