one must be necessarily given up. this raised a major intellectual and policy challenge for european countries trying to strengthen economic cooperation after the second world war : it seemed simply inconceivable to jettison any of the three goals. tommaso realised that financial repression would have provided only a temporary response to this question. the accomplishment, in the early 1990s, of the central goal set down in the treaty of rome – a european common market, implying free trade and free capital movement – called for enhanced, and eventually fixed, exchange rate stability across member countries. this is because exchange rate volatility, coupled with systematic devaluation of a group of currencies against other currencies, would have eventually impaired the very functioning of the common market, a theme to which i will return later. indeed, the whole history of european monetary cooperation between the collapse of bretton woods and the early 1990s is marked by attempts to maintain fixed exchange rates. these attempts were periodically punctuated by major tensions between national currencies ( with consequent clashes between member states ) each time a country was forced ( or tempted ) to devalue or even abandon the common fixed exchange rate arrangement. in this context, the economically most coherent way to reconcile intra - regional free trade and free capital movement with fixed exchange rates would have been for european countries to adopt a single monetary policy and therefore a single currency floating against the rest of the world. this was, in tommaso ’ s view, the right approach to the solution of the impossible trinity once the objective of the single market had been attained ( figure 1 ). and indeed tommaso preferred to talk about an “ inconsistent quartet ” ( quartetto inconciliabile ), which included a fourth element, free trade, in order to take full account of the european context. in the early 1980s these ideas were still pioneering and visionary, but we all know how influential they have become in shaping the history of our continent, to the extent that they have transformed themselves from vision into reality. figure 1 tommaso padoa - schioppa ’ s view of the impossible trinity proposition bis central bankers ’ speeches while tommaso saw a role for exchange rate adjustments at global level, he was very well aware that, to avoid imbalances accumulating and crises – even systemic crises – breaking out, sovereign countries have to pay proper attention to the negative externalities of their domestic policies and to enhance their cooperation, also as

in sum, monetary and financial conditions remained supportive of economic activity in the fourth quarter. accordingly, the credit channel has maintained its expansionary effect on the consumption and investment demand. 3. inflation and monetary policy outlook after summarizing our monetary policy stance and its impacts on the financial markets, i would now like to talk about the financial outlook and assumptions underlying our forecasts. third quarter national accounts data are consistent with the outlook presented in the october inflation report. following the deepening debt crisis in european economies since may, the growth rate of gross domestic product slowed down in the third quarter and displayed an increase of 5. 5 percent year - on - year ( figure 17 ). the largest contribution to annual growth in the third quarter came from private sector demand through consumption and investment ; whereas, due to the contraction in exports and the acceleration of demand for imported goods, the net foreign demand contributed to annual growth negatively. thus, the divergence between domestic and foreign demand growth has become evident ( figure 18 ). bis central bankers ’ speeches recent data releases indicate that the third - quarter slowdown in economic activity is temporary. the composition of economic activity suggests that the divergence between domestic and foreign demand continued in the fourth quarter. domestic demand for imported goods accelerated in the last quarter amid rapid credit expansion and lagged effects of the appreciation of the turkish lira in the third quarter. as a result, the current account balance continued to deteriorate ( figure 19 ). the slow recovery in the global economy continues to restrain economic activity, whereas the strong domestic demand bolsters aggregate demand growth. in fact, the sharp upward trend in private consumption and investment spending that started in the fourth quarter of 2009 continued into the fourth quarter of 2010 ( figure 20 ). continued economic recovery fueled by robust domestic demand has supported the gradual improvement in employment conditions. the rapid recovery in non - farm employment paused in the third quarter of 2010, which appears temporary, as suggested by leading indicators bis central bankers ’ speeches ( figure 21 ). however, due to high labor force participation rates, it will take a while before unemployment rates come down to precrisis levels ( figure 22 ). therefore, it is unlikely for unit labor costs to be subject to cost pressures in coming months. in sum, monetary conditions remained supportive of domestic demand in the fourth quarter. private demand recovered more rapidly amid increased consumption and investment spending, therefore aggregate demand conditions provided less support for disinflation than suggested in the october inflation report