moving towards the banking and financial union that was missing from monetary union. 3. the eurosystem is providing valuable support during this period of necessary reforms it is clear that the ultimate responsibility for exiting the crisis lies with governments, at national level – implementing reforms, consolidating public finances and restoring competitiveness – and at the collective level – agreeing on and implementing a more coherent and comprehensive institutional framework around monetary union. these reforms are obviously – and fortunately – the fruit of a democratic process and can only be that. but bis central bankers ’ speeches the corollary to this is that these necessary reforms cannot be immediate : they take time, first to be implemented and then to yield their effects. and the time of the markets is not that of democracy, as you know. doubts and delays create nervousness, volatility and worry in financial markets, which often leads to sharp rises in interest rates for countries deemed to be vulnerable. the eurosystem has decided to take firm action when it considers that these interest rates do not reflect a genuine credit risk differential, but rather unfounded fears about the reversibility of the euro. because at that point, the effectiveness of the single monetary policy is clearly jeopardised : the key interest rates that we set no longer feed through to the real economy in the same way in all countries via the bank lending channel – which is a crucial channel in the euro area given the predominance of intermediated financing. in order to fulfil our mandate of maintaining price stability, our monetary policy impulses need to be transmitted homogeneously across the whole area. this is why we decided to create a new instrument : outright monetary transactions. the idea is to have a credible backstop to counter unjustified increases in sovereign yields. this backstop must naturally be accompanied by strict conditionality to guarantee that the country concerned makes effective progress towards a more robust economic situation. by means of this new tool, as with all of the other tools that we have deployed since the start of the crisis – in particular the measures to support bank liquidity – the eurosystem is endeavouring to relieve the pressure from the markets which may undermine the ability of countries to implement the reforms embarked on, and which may eventually jeopardise price stability. we shall continue to take all of the necessary action to fulfil our mandate and contribute, within this framework, to the success of this tricky but necessary period of transition towards a more coherent, stable and

christian noyer : remaining challenges facing the euro area speech with mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the foreign correspondents club of japan, tokyo, 10 october 2012. * * * ladies and gentlemen, i would like to start by thanking the foreign correspondents club of japan for this invitation. i am delighted to be here with you today to discuss, here in tokyo before an audience from different backgrounds, the situation in the euro area. for the past few years the euro area has been going through a major crisis. this crisis has multiple causes that call into question the institutional foundations of monetary union. i strongly believe that the different roots of this crisis have now been thoroughly analysed and are being effectively addressed. the main challenge facing the euro area is to pursue the efforts underway to return to balanced budgets, regain competitiveness and growth and strengthen economic and monetary union. 1. what is the situation in the euro area? in early 2012 the outlook seemed encouraging. confidence appeared to be steadily returning, the decisions taken, in particular the very long - term refinancing operations – had calmed the markets. nevertheless, pressures quickly mounted again, reflecting especially the difficulties experienced by greece and spain. it became clear that the situation was still precarious, and that the solutions hitherto adopted in the euro area had to be enhanced in order to be truly lasting. today there are a number of positive signs : bond market activity is reasonably buoyant, yields of peripheral countries have declined slightly and stock markets have picked up. however, two major weaknesses persist : – financial markets are highly fragmented within the euro area and sovereign yield spreads remain substantial ; – growth is weak and, here too, there are major disparities within the euro area. in the second quarter, growth stood at - 0. 2 % for the area, after stagnating in the first quarter. germany posted the highest growth, at 0. 3 %, and portugal the weakest, at – 1. 2 %. we are still expecting growth to recover very gradually next year. before discussing how to address these problems, we have to correctly analyse the causes. in my opinion, three mutually reinforcing causes gave rise to the euro area crisis. 1. the main origin of the crisis lies in the lack of fiscal discipline on the part of most member states. while these countries had had to make considerable consolidation efforts