assessing the proportionality of public policy measures for the law. this was carefully explained by european court of justice president koen lenaerts, at the ecb ’ s recent annual legal conference. 1 he outlined that when assessing proportionality, the court applies a judicial review limited to manifest errors. with this approach, the court acknowledges that institutions like the ecb enjoy a margin of assessment within the limits of their competences to weigh technical considerations that go beyond the court ’ s own competence and expertise. at the same time, the court does require that institutions have in place a due process that ensures that within their margin of assessment, all factors and circumstances of relevance at the time of a policy decision are considered, including the impact of the action on other policies and the existence of less intrusive means to achieve the set objective. this is what the governing council ’ s proportionality assessment needs to account for. and to achieve that, our monetary policy strategy includes an integrated assessment framework to support our deliberations on monetary policy options. this framework builds on two interdependent analyses : the economic analysis and the monetary and financial analysis. the economic analysis focuses on real and nominal economic developments which includes economic activity, employment and price and wage developments. the monetary and financial analysis examines monetary and financial indicators which includes lending by banks and nonbanks, asset prices and financing conditions. the focus here is on monitoring how our monetary policy decisions transmit throughout the financial system into the wider economy and assess whether any impairments in that mechanism could be harmful to our price stability objective. moreover, the monetary and financial analysis allows us to monitor the possible risks to mediumterm price stability from financial imbalances. these two strands of analyses do not stand in isolation. indeed, the important role of macro - financial linkages in economic, monetary and financial developments requires that the interdependencies across the two analyses are fully incorporated. each monetary policy decision by the governing council – even if it reconfirms decisions taken in a previous meeting – builds on the evidence provided for by our integrated assessment framework. this evidence informs our discussion on the monetary policy stance required to ensure that economic, financial and monetary developments are consistent with maintaining price stability. and it also supports our decisions on the choice, design and calibration of instruments that deliver the required monetary policy stance. in this sense, our analytical framework enables us to ensure that the blend of our policy instruments is proportionate to the 2 / 6 bis central

because the bundesbank had always refused, even in times of crisis, to purchase government bonds. can you understand these specific german concerns? trichet : i fully understand the particular sensitivity of my german friends. but facts are facts : inflation in germany has never been as low as it has been over the past 11 ½ years. the german fellow citizens can see that the euro has indeed been a good store of value over time. spiegel : but people are concerned about the future. they fear that inflation will return and that their savings will lose value. trichet : at one time the bank of england and the federal reserve decided to embark on “ quantitative easing ”, namely the purchase of public bonds in order to supply as much liquidity as possible to the market. what we are doing at present is totally different. we will withdraw all the additional liquidity that we supply. spiegel : many germans also fear that their government is becoming the paymaster of europe. trichet : i understand the germans ’ fear of inflation, and their anxiety about their budget and their contribution to europe. in france, i have occasionally been called the “ ayatollah of the franc fort ” … spiegel : … what has two meanings : frankfurt and a strong euro … trichet : …. because i advocate a strong currency policy. inflation is destructive for societies and democracy. inflation is a tax on the poor and the weak. that is my very firm conviction. spiegel : there is always a great temptation for politicians to spend more money than they have. inflation helps them to reduce their debt. trichet : of course, we must now demand extensive adjustment programmes from the governments, which the heads of state and government committed to the friday before last. they are committed to accelerating the consolidation of their budgets. they know what is at stake now. spiegel : would it not be good if a country such as greece were able to leave the euro area? trichet : no. this is excluded. if a country joins the euro area, it shares a common destiny with the other members. there is a need for a quantum leap in the governance of the euro area. there need to be major improvements to prevent bad behaviour, to ensure effective implementation of the recommendations made by “ peers ” and to ensure real and effective sanctions in case of breaches. the ecb is calling for major changes, and i will explain this in the task force chaired by mr. van rom