i will begin by doing, before setting out my three new ideas for europe. * * 1. three old cliches that we must put behind us the first old cliche that emerges when we speak about reforming the euro area, is the idea – and a lazy idea at that – that economic union would be a substitute for national reforms. i would like to repeat right away that on the contrary, national reforms are a prerequisite for any enhancement of the economic union, and today, france is well aware of this. i say this in my capacity as a totally independent central banker : the new government in france is taking reforms very seriously and is acting with impressive speed. france is now a reliable economic partner of europe and germany. second, it would be ridiculous to reduce the debate to the old caricature that contrasts " german rules ” with “ french expenditure ". to my mind, it is out of the question to implement a “ transfer union ”, which would only benefit certain countries, or to introduce eurobonds, which would amount to collectivising debts. need i remind that france too is a net contributor to the european budget, or to financing for greece? but i am convinced that risk sharing between 1 / 3 bis central bankers'speeches countries can – and should – go hand - in - hand with risk reduction mechanisms. it is wrong to draw a distinction between solidarity and responsibility : in reality, they are complementary. for crisis prevention to be credible, it must also have the instruments needed to cushion the effects of substantial shocks that may arise regardless. as for the third cliche, let ’ s stop pitting the " french vision ” against “ german pragmatism ". in order to reform the euro area, we must be practical and take real needs, and particularly those of businesses and entrepreneurs, as our starting point – as i aim to do in the second part of my speech. in 1978, helmut schmidt said that “ the citizens of europe just want solutions to concrete issues ". 2 nonetheless, we need a political ambition if we are to act – call it a “ vision ", if you wish. we need this because we have to make progress – it ’ s now or never : thanks to the economic recovery, and thanks to president macron ’ s initial proposals at the sorbonne, and the european chapter of the german coalition agreement – it is obviously not my place to comment on the rest of the agreement – we are enjoying historically favourable conditions.

surprises in demand. and this helps to reduce the ups and downs of the business cycle and to promote sustained economic growth. the forward - looking framework of inflation targeting also allows us to handle temporary supply shocks, so long as these shocks do not feed into inflation expectations. the monetary credibility gained through our inflation - targeting system means that changes in volatile energy or food prices no longer feed into other prices and into wages the way they did in the past. that is why, unlike some other central banks, we focus on the underlying trend of inflation, and use as our operating guide a core rate that excludes the eight most volatile components of the consumer price index ( cpi ) and the effect of changes in indirect taxes on the remaining components. such a measure of core inflation is a better predictor of future inflation than the total cpi. with this approach, monetary policy responds only to fundamental trends and does not turn temporary price shocks into something that can destabilize the economy. how the bank of canada deals with international disturbances so far, i have described how our monetary policy framework, based on an inflation target, helps us respond to, and deal with, important surprises that have an impact on our economy. i would now like to say a few words about how the bank of canada incorporates external economic shocks into its decision - making process. canada is a small and very open economy. we export more than 40 per cent of what we produce and, in general, we are price - takers ( that is to say, the prices of what we buy and sell abroad are largely determined in world markets ). thus, the external environment is extraordinarily important to us. as part of its decision - making process, the bank has always followed world economic developments very closely. the bank's governing council starts its deliberations by looking at changes in the external environment. in particular, we focus on economic prospects for the united states and the major overseas countries, as well as on world commodity prices. then we look at the implications of all this for aggregate demand in canada. next, we focus on domestic demand, taking into account anecdotal information gathered by our regional offices, as well as trends in credit, money, and financial markets. all this feeds into our decision on interest rates. let me try and relate this to recent experience. take last year, for example. through the first half of 2001, we moved to loosen monetary policy at a measured pace. this approach was based on