vitor constancio : common european values and monetary policy to reinforce the euro area speech by mr vitor constancio, governor of the bank of portugal, at the dinner in honour of the governing council of the european central bank, lisbon, 5 may 2010. * * * prime minister, minister of state and finance, president of the european central bank, colleagues, ladies and gentlemen, it gives me great pleasure to welcome you all in this place full of history on the occasion of a meeting of the governing council of the european central bank. look around. we are in a place that highlights two portuguese adventures. firstly, this monastery of jeronimos was built in the xvith century to celebrate our maritime discoveries and secondly, here, in this very cloister, was signed our accession treaty into the european union in 1985. a few yards from here is the shore from where set sail the ships to launch the discoveries. for almost a century portugal kept a monopoly of the spice maritime trade with india and the far east, where our ships arrived in 1498. in 1500 the fleet of alvares cabral arrived in brazil with all its riches. in 1501 the construction of this monastery began and was completed after several decades. as all major buildings of the time it was built to celebrate spiritual and earthly endeavours. on the northern side of this cloister we find symbols of the passion of christ. on the southern side we have the symbols of kingdom and kings. the concept was that the history of portugal and our monarchic dynasty interconnected with the history of christianity. appropriately, the king was called manuel, from emmanuel ( meaning god with us ) announced by isaiah as the saviour, and the king ’ s wife was named maria like the mother of christ. the armillary sphere is an instrument of navigation with the celestial orbits, used by the king as his symbol and combined with the christian cross it appears in different places. empire, earthly power and religion come together. politics also enters. the monastery was given to the hermit order of st. hieronymus, a spanish order of monks devoted to the perpetual service of the dynasty reigning in castille. this is explained by the aim of our king of becoming the heir to the castillian crown thus unifying the two kingdoms. he had after all just celebrated his second marriage to maria of castille, the sister of the great queen isabel. you see then how european history and politics are present

that has to be significantly reduced, namely through the mechanisms i have already described. we have lived beyond our means and, as kenneth rogoff recently said, “ financial regulation has been appropriate, otherwise the situation would be much worse ”. the point is, that we needed time to continue the adjustment and in principle, monetary union was supposed to give us that time for a gradual process of rebalancing. the international financial crisis that started in 2007 interrupted the process and the more recent market attacks on euro area countries vulnerable in terms of sovereign debt implies that time became a luxury : we have now to make a more abrupt, quicker and more severe adjustment. as i warned already in 2001 : “ conceived for an infinite or very long horizon, the technical definition of external sustainability ends up not being truly operational because it only refers to the capacity of the economy to pay its debt within that time horizon. operationally, what counts is the assessment made by investors about that capacity of repayment, which means that the possibility of financing depends on many factors, sometimes not fundamental ones ”. that is what we face now and so, we may need to ponder whether the recently approved stability programme should be reinforced by adopting upfront measures foreseen for later years. we must be resolute and clear - headed in recognizing the reality of how markets operate and, as captains of an embattled ship, we should not complain too much about the sea where we have to navigate. we have to take comfort from the fact that we are not alone in this. a monetary union is not a sort of multilateral currency board. all member countries have a common interest in the well being of our union and its currency. we all share the guilt related to the failure of governance in the preventive arm of the stability pact. we ourselves, have never tried to hamper the functioning of the pact and, when caught at fault, we have abided by the rules. the recent events revealed indecisions and surprising misinterpretations of self - interest, but the system worked and deserves our trust. the need for reforms in surveillance and crisis management became nevertheless apparent, including the creation of an european monetary fund that had been foreseen in very early discussions about monetary union, and i am sure this episode will have consequences for future institutional arrangements. everything must in fact be done to reinforce the euro area. we can all see how it was important to face the international financial crisis. from the