. again, a large current account deficit is often associated with a currency crisis, but there are enough important exceptions to question whether this would be a useful indicator of an impending currency crisis. for example, neither indonesia nor korea had large current account deficits in the 1990s ( including in 1997 ), nor did either the united kingdom or italy in 1992. the celebrated case in the opposite direction is singapore, which ran a current account deficit which averaged 15 per cent of gdp for the decade of the 1970s without a currency crisis. as you may have noticed, i have not mentioned any of the economic characteristics that have received so much attention in discussions of the current asian situation. these include longstanding structural features such as soundness of the domestic banking system, the transparency of business relationships, the degree of government involvement in private investment decisions, or the quality of bank supervision. while these are important, they are important in a different way. deficiencies in these areas clearly cannot be the cause of the recent currency crisis in asia, because these deficiencies have been around for decades. they did not deter international capital from flowing in year after year and, therefore, could not be the cause of the change of direction in 1997. they are important, not because they cause a currency crisis, but because they provide an environment where a currency crisis can lead to a severe economic crisis. severe economic crises whether a currency crisis leads to a severe economic crisis or not depends on two factors - how far the currency falls, and how resilient the economy is to a lower exchange rate and higher interest rates. ( a ) the size of the depreciation this may sound as though it is a small diversion from the main theme, but it is not. it is quite possible that an exchange rate may fall by an amount much greater than anyone expected on the basis of ex ante information ( anyone can always make up an ex post justification ). this should not surprise us because no - one has yet been able to find a satisfactory explanation for movements in the exchange rate. that is, no - one has found an equation linking the exchange rate to various economic variables that is good enough to yield forecasts that outperform crude rules of thumb. we know that certain factors, such as those listed in the previous section, are associated with falls in the exchange rate, but we do not know whether the fall will occur this month or in two years, or whether it will be 10 per cent, 20 per cent or 80 per

the financial sector is back on track and ready to lend on a sustainable basis. i would say exactly the same with the budget. decisions have been taken ; they are very important. let ’ s do it! quick implementation, quick disbursement is what is needed. not embarking on useless and counterproductive quarrels which fortunately are over now. wsj : if recovery does not take hold gradually in 2010, does the stability and growth pact give european governments room to do more? mr. trichet : the stability and growth pact has been revised to cope with exceptional circumstances. it is our way to maintain appropriate cohesion in a single market with a single currency and with no single federal budget. respect of the procedures and provisions of the stability and growth pact is of the essence. wsj : ireland expects an 6. 5 % decline in gdp this year. their deficit is projected to be 10 % of gdp and they ’ ll soon introduce a budget that will raise taxes. is that really the appropriate response in the teeth of a deep recession? mr. trichet : i am not speaking of one country in particular. in each case you have to see what your own room for maneuvering is. if the additional deficits are costing you both, a strong increase of the cost of your own refinancing and a loss of confidence of your people, you ’ re not better off! if your people have the sentiment that they will be not better off in an endless spiraling of deficits, they will not spend any money that you give them today! wsj : there are a number of countries that, absent the euro zone, would have made an adjustment in real wages through devaluation. how do you see adjustments in real wages now being made in the euro zone's less - competitive economies? isn ’ t the inevitable consequence in certain countries falls in real wages and deflation, even if that doesn't occur in the euro zone as a whole? mr. trichet : the euro zone is a single market with a single currency and the various countries have to be considered exactly as the various states of the u. s. a. it goes without saying that the situation of the various states in the u. s. a. is not all alike. in a small number of euro - zone cases – this has nothing to do with the present crisis – there is a necessity to progressively catch up with a level of competitiveness which had been