eu has strictly limited risk sharing arrangements between member states and none between the national banking systems. now, in the crisis, the divergence of the euro area economies has dramatically increased and the ecb could easily end up becoming such a risk sharing mechanism. the ecb or the eurosystem cannot become a mechanism for sharing fiscal risks between the member states. this is because its monetary policy and its independence could be compromised. the risks taken by the eurosystem must therefore be limited to what is required by monetary policy and by the goal of ensuring the transmission of the monetary policy to all parts of the euro area. there are very good reasons for not monetizing budget deficits in countries with a national currency. there are even more reasons for not doing so in a monetary union such as the euro area. before the crisis, it was too often argued that current account positions between members of a currency union are meaningless, and that there cannot be balance - of - payments crises within a currency union. the last couple of years have proven the fallacy of this view. the sovereign debt crisis carries all the hallmarks of a balance - of - payments crisis. it goes without saying that a central bank whose job it is to equalize monetary conditions between the crisis countries and the safe - haven countries will inevitably face a formidable task. it can only succeed if the imbalances within our currency area are solved, in the medium term, by real adjustments, including budgetary adjustment. the ecb is protected by its institutional independence. but as the crisis has demonstrated, this independence needs to be complemented by economic policies that avoid the build - up of serious imbalances within the currency area. all in all, the tradeoffs the ecb has dealt with during the crisis have been difficult. the challenge has been to do what is necessary to maintain a sufficient functioning of monetary policy transmission mechanism for the single monetary policy to operate, while at the same time avoid creating significant moral hazard and avoid making monetary policy a vehicle of fiscal transfers. the path between the two is narrow, and only time will tell whether we succeeded. conclusions the evolution of economics is driven by crises. the breakdown of the bretton woods system and the inflationary years of the 1970s gave impetus to an era of rapid progress of monetary economics. the result was a vast literature on central bank credibility, independence, transparency and price stability mandate. at the beginning of the new millennium, the development of monetary economics reached its culmination.

provide sustainable growth and to increase employment throughout the country. the role of monetary policies has been misunderstood for a long time. this wrong assumption is that the increase in inflation and growth are parallel to each other and growth rates can be accelerated by loosening the monetary policy. frankly speaking, in the framework of early economics literature, this assumption can only be verified in the short term, in countries where inflation rates are low and there is no credibility gap in monetary policies. however, the models developed and long - term analysis made after 1980s revealed that the loose monetary policy under high inflation conditions could only end up raising the inflation rate and growth would slow down due to uncertainties arising from inflation. we very well know from our own high inflation experiences in the past three decades and other countries ’ experiences that average growth slows down when inflation climbs and average growth accelerates when inflation falls. the high growth rates we achieved in the past three years, which were marked by the stability program, is a good evidence of this generalization. attaining price stability is a prerequisite for achieving sustainable growth. for this very reason, today, the primary objective of the central bank is to achieve and maintain price stability, which makes the biggest contribution to sustainable growth and increase in employment. distinguished participants, in this part of my speech, i would like to dwell on the three pillars of the change observed in inflation dynamics under falling inflation process. the first significant change observed in economies under falling inflation conditions is the decline in interest rates. if enough credibility has been established in the falling inflation process, significant decline is observed both in nominal and real interest rates and this process does not only lead to rise in expenditures but also in investments. within this framework, a more detailed examination of the struggle against inflation process in turkey reveals that decline in inflation also helped mitigate the fluctuations in inflation and this means less uncertainty and less volatility in economy. while decreased uncertainty brings along decline first in risk premium and then in nominal as well as real interest rates, it decreases borrowing costs from the consumers ’ point of view, and opportunity cost of investments from the producers ’ view point. at this point, i would like to draw your attention to a risk factor in which the decline in borrowing costs has a significant role. under chronic inflation conditions, consumers tend to renew durable goods such as automobiles, white goods and alike less frequently. however, when a certain point is attained in the process of reducing inflation, the consumers start purchasing their postponed needs. demand for