also aware of the problems of maturity mismatches on balance sheets, the challenges of raising levels of capital and the cyclical risks related to the downturn. challenges for europe ’ s economic and monetary union let me now turn to the overall functioning of europe ’ s economic and monetary union. looking back at 2010 and 2011, notable progress has been achieved in reinforcing economic governance – though i recognise that this may not be evident in times of crisis. the european parliament has contributed decisively to that progress, and the ecb commends that work. the “ six pack ”, the european semester, the euro plus pact : all these initiatives have set the stage for closer coordination and more intensive scrutiny of economic policies in the eu, particularly in the euro area. yet we are at a difficult stage at present. we have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. and the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets. fundamental questions are being raised and they call for an answer. at the heart of these questions are not only the credibility of governments ’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance. i am confident the new surveillance framework will restore confidence over time. i am also quite sure that countries overall are on the right track. but a credible signal is needed to give ultimate assurance over the short term. what i believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made. just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively. bis central bankers ’ speeches we might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer - term vision can be helpful in the short term. our answer is that it is definitely the most important element to start restoring credibility. other elements might follow, but the sequencing matters. and it is first and foremost important to get a commonly shared fiscal compact right. confidence works backwards : if there is an anchor in the

. in the light of heightened geopolitical uncertainties, the price per barrel of the leading north sea oil, brent crude, has been ratcheted upwards by around 25 % since the beginning of the year, peaking at close to usd 117. rising oil prices have already had a clearly visible effect on the rate of inflation in the euro area. this stood at 2. 4 % in february of this year and will hover markedly above 2 % in the coming months on the back of persistently elevated oil prices. our assessment is that the risks to medium - term price developments are tilted to the upside. in their most recent projections for the euro area, ecb staff see inflation ranging between 2 % and 2. 6 % this year and between 1 % and 2. 4 % next year. it must be stressed, however, that these projections do not take into account the recent oil price hikes and are based on the assumption that wage pressures will remain subdued. the question also remains unanswered as to whether indirect taxes and administered prices stemming from the necessary fiscal consolidation measures of the next few years will rise more sharply than currently anticipated. against this background, strong vigilance is, of course, necessary and we are monitoring the situation closely. should there be any signs of inflationary risks over the medium term, the ecb is ready and determined to take appropriate action in good time. in summary of our assessment of the current situation, it is safe to assume that the cyclical recovery that is under way stands on sound foundations. the oil price - indiced increase in inflation is being monitored closely. the fact that this view of the overall economic situation is actually rather favourable, ladies and gentlemen, is due not least to the stability of the euro, to a monetary policy stance oriented to stability and to the decisive action undertaken in the financial crisis to stabilise the banking sector. let me explain this in somewhat greater detail. the financial crisis as a test of the strength of the euro the financial crisis has put the euro and the economy of the euro area well and truly to the test. during the financial crisis, the governing council of the ecb proved its capacity to take the necessary steps in a timely manner and its readiness to contribute positively to financial stability. the speedy intervention of the ecb made it possible to prevent the liquidity and confidence crises from spiralling into a systemic crisis. the ecb responded immediately – as early as bis central bankers ’ speeches 9 august 2007