lucas papademos : some reflections on the stability and growth pact speech by mr lucas papademos, vice - president of the ecb, at the annual dinner of the institute of chartered accountants in ireland, dublin, 5 april 2004. * * * mr president, ladies and gentlemen, i understand that in addressing you this evening i am following in the footsteps of very distinguished speakers, including both the current and the previous presidents of the irish republic. this is both an honour and a daunting task for a central banker such as myself. unlike many heads of state, central bankers are not, in general, renowned for their great oratory. but i will do my best not to disappoint. and i feel reassured by the audience tonight. central bankers and accountants have certain things in common. we both spend a considerable part of our time looking at, counting and assessing numbers. central bankers like counting numbers. but we don ’ t like to have to count too far. for example, with regard to inflation, at the ecb we like to count only up to two, that is “ two percent ”. actually, “ below but close to two percent ” is our stated preference. if we are measuring the size of euro area countries ’ budget deficits, we really don ’ t like to have to count much at all. and, in fact, my colleagues and i can get quite irritable if we have to count above three percent. this is because the maastricht treaty and the stability and growth pact say that we should not have to do so, or at least not very often. and if an occasion should arise when we do have to count above three percent, then a procedure is foreseen to ensure that this state of affairs does not last for too long. unfortunately, we have been doing a lot of counting above three percent recently. and last november, the ministers of economy and finance in the ecofin council decided that the procedure designed to correct this state of affairs could be put on hold for the time being. my colleagues and i in the governing council of the ecb have made clear our concern about the ecofin council ’ s decision last november. and our concern has increased in the light of information that has recently become available indicating that public finances in a number of eu member states have deteriorated since then. mr president, in your letter inviting me here this evening, you mentioned that the banking and wider business community is also concerned and that you

our disposal. but it would be confusing to highlight individual instruments now because the use of a given instrument depends on the situation. for example, we would react with completely different means if the money markets were to stall than if there were a setback in the economic situation. but the ecb has already pumped so much cheap money into the system and it is still not getting through to the markets. yes, it is. it is getting through to the markets very well. it is just that it is still the case that too little is getting through to the real economy. could negative deposit rates be an instrument that would help here? i do not want to speculate about individual instruments. any instrument may be used if the situation demands, including the one you mention. in several months ’ time, the ecb will take over supervision of large euro area banks. will we no longer see banking crises after that? since the outbreak of the financial crisis, banking regulation has made huge progress all over the world. in europe, approximately half a trillion euros of additional capital has flowed into the banking sector in the past three years alone, half of it from private sources. but i would never say that these improvements mean that there will be no more crises. nobody knows where the next crisis will come from. it is therefore important to make the financial system as a whole even more resilient. but are there not simply too many banks in europe? that is very hard to say. the ecb ’ s asset quality review of the banks that is currently being conducted pursues one goal in particular : we want to shed more light on bank balance sheets and therefore indirectly also on that issue. the markets and investors should know what state europe ’ s banks are really in. we want full transparency. only through transparency will investors be ready to provide additional capital for banks. bis central bankers ’ speeches yet this means that the ecb ’ s audit of the banks could itself become a systemic risk. if the ecb were to notice very large capital shortfalls or a large number of banks that are not capable of surviving, this would potentially trigger a new banking crisis. i see it completely differently. if there are problems in europe ’ s banking sector, they are there, regardless of whether we uncover them or not. in the financial system in general, light is always better than darkness. only by uncovering weaknesses in the banking sector can measures be taken to correct them, be it through recapitalisation, restructuring