. do you think that banks will have to recapitalise? asmussen : this is precisely what we do not know as yet. every figure that is floating around is mere guesswork. but we need to have sufficient back - stops in place. there are several layers : the first is private capital, the second are national budgets and the third layer is formed by the esm that recapitalises banks as part of a banking sector programme with attached conditionality, as it was done in spain. as a last layer and only in very rare occasions, there can be a direct recapitalisation of banks through the esm. a credit crunch is a problem for growth. what other impediments can you see with respect to a recovery in the euro area? asmussen : fragmentation has decreased since last year, but it is indeed still a matter of concern. cœure : trust in the euro has now been restored and it is an important basis for confidence and an economic recovery in europe. what is now needed is further economic reform in all countries. but isn ’ t the exchange rate of the euro itself too high, vis - a - vis the us dollar or the japanese yen? asmussen : we do not have a target exchange rate and we have to say that again and again. in any case, it is a sign of confidence that capital flows from outside have returned to the euro area. cœure : when you look at the export performance of various countries, you can see many differences, so that the exchange rate of the currency as such cannot be considered an impediment to growth. that said, it is one of the indicators that we follow closely. however, it is a common complaint in france … cœure : here, i can speak from past experience. there is a particular fascination for currency matters in france that is not shared by other countries. it cannot be used as an excuse not to address the issues of structural competitiveness that french companies are facing. in france, there are fears that the risk of deflation might be very high... asmussen : we cannot see any risk of deflation. we see inflation expectations as being well anchored below, but close to, 2 % for a longer period of time. cœure : and that is a major difference to the situation in japan. there have been comparisons, but whereas in japan, low growth has led to deflation expectations, this has never been the case

in the euro area and, as jorg has said, expectations there have remained very well anchored. but as in japan, people in europe are talking about a lost decade. cœure : there is a risk of a lost decade in europe, if the right reforms are not undertaken. but the challenges and answers are very different from those in japan. it is true that the crisis has been a step backwards [ a setback ] for the european economy, but the underlying problems, such as declining trend growth and unsustainable social promises, were there before. the crisis has only uncovered them and has shown the need for answers more clearly and more urgently. but the high level of unemployment is certainly worrying … asmussen : yes, the level of unemployment is unacceptable. but the question is what we can do about it. we have a strategy in europe that is based on stable prices, sound fiscal policies bis central bankers ’ speeches and growth and employment - enhancing structural reforms. it will take some time to see the positive effects, but i don ’ t see any viable alternative. cœure : the high level of unemployment, particularly youth unemployment, shows the urgency of taking forward - looking reforms at the national level and, collectively, at the euro area level. with the crisis, differences between countries are becoming clearer and larger. is it a challenge for friendship between european nations? asmussen : we must acknowledge the resurgence of national stereotypes. that is worrying. the cliche that the greek people are lazy, whereas all germans are hard - working, is simply false … reality is more differentiated. cœure : we see the risk of nationalism in european discussions as well, with the temptation to defend narrow national interests. but politicians can overcome this temptation and make progress. take the banking union, for example. it is the most important step to be taken in european integration since the inception of the euro, perhaps more important than the single currency itself. it will have far - reaching consequences for national economic models and national legislation. so there is room for optimism if we succeed in taking that quantum leap forward. isn ’ t that overly optimistic? what can germany and france do to overcome these challenges? asmussen : you have described the challenges rightly, but the answer to them can only be more integration. france and germany have a leading role to play, because they stand at the core of european integration. they jointly, but only jointly, fulfil the definition of a superpower : if