yves mersch : amcham – principles versus rules speech by mr yves mersch, governor of the central bank of luxembourg, at a conference of alfi and the american chamber of commerce ( amcham ), luxembourg, 14 june 2007. * * * ladies and gentleman, i would like to thank alfi and american chamber of commerce ( amcham ) for inviting me to participate in this conference. i am sure that this conference will reveal interesting views on the topics regarding principles versus rules - based approach. we will surely return home with new insights and suggestions for further research and developments. through my own research, i observed, as underlined by one member of the us securities and exchange commission, that there is confusion as to the difference between rules and principles. principles are frequently defined as “ accepted and professed rules of action or conduct ”. this confusion about rules and principles leads me to approach this topic from different angles. 1. in my view, rules have the benefits of being precise and durable. further, they are widely accepted and adhered to by the industry and they generally achieve the sought objectives. finally a rule reflects the consensus of past situations and can only address circumstances known or anticipated by regulators at the time of implementation. thus, rules become outdated as circumstances change. while principles are characterized by less preciseness, they remain more durable and widely accepted. however, their implementation is weaker and thus leaves more room for judgment. the setting of principles may be more appropriate in a rapidly changing environment marked by financial innovation and growing cross - border financial activities. indeed, principles leave an open window to adapt judgments in case of changing circumstances and thus, need less frequent changes which would spread out confusion. but we have to be conscious that principles ought to lead to rules just like a constitution needs laws to be effective. the constitution of the soviet union, which was considered as one of the most democratic, went unheeded due to the gap in practice between this constitution and laws. 2. of course, there are differences between private and public rules, only the latter benefiting from the monopoly of forceful implementation. principles may also have private or public sources. therefore the question of rules versus principles is often addressed through the criteria of the degree of cooperation or responsibility of the private sector. but additional criteria can be added such as the implication of the private sector in the elaboration and implementation of rules or principles. this conducts to reduce the potential conflicts and improve the identification of regulatory objectives, and the effectiveness

1. 7 % in 2016 and 1. 8 % in 2017. again compared with the projections in june, the outlook for real gdp growth has been revised downwards. this is due primarily to lower external demand owing to weaker growth in the emerging markets. the risks to this outlook are tilted to the downside, reflecting in particular the increased uncertainties related to the external environment. notably, current developments in emerging market economies have the potential to further affect global growth adversely via trade and confidence effects. before addressing the second part of my remarks, let me revert to the evolution of the output gap, i. e. the difference between actual and potential output. the negative output gap is expected to narrow gradually over the projection horizon, which is encouraging news. ecb staff macroeconomic projections for the euro area, september 2015. eurosystem staff macroeconomic projections for the euro area, june 2015. bis central bankers ’ speeches however, it is also necessary to stress that while the output gap is narrowing, it is occurring against a background of weak potential output growth, which is estimated to be around 1 % over the projection horizon. this is below its pre - crisis level. in noting this, we should, moreover, not overlook the fact that since the late 1990s the euro area experienced a steady decline of potential output growth : from about 2 % in 2000, it declined continuously to about 1. 5 % before the crisis. there is indeed a problem in long - term growth dynamics. this problem is not new but has deepened over time. with this in mind, let us consider very briefly fiscal and monetary policy before focusing later on structural reforms. starting with fiscal policy, it should support the economic recovery, particularly through growth - enhancing public investment, material and immaterial, while remaining fully compliant with the stability and growth pact. a full and consistent implementation of the pact is crucial to maintain confidence in the euro area ’ s framework. this, in turn, would have positive implications for future growth prospects, which should help ensure debt sustainability and be conductive to future fiscal space. with regard to monetary policy, which has to be focused on the primary objective of maintaining price stability over the medium term, its highly accommodative stance has contributed and continues to contribute to support economic activity and investment, narrow the negative output gap and foster economic growth. let us also bear in mind the important fact that price stability, as well as financial stability, is a conditio sine qua non