, existing at the time. some 20 years down the line, the financial crisis and sovereign debt crisis in certain european countries have once again put the european economic cooperation under pressure. the most recent crisis has differed from the situation in the early 1990s when each eu member state had its own currency. if national currencies had not been replaced by the euro in 1999, we could very well have seen an extensive currency crisis on top of the financial crisis and the sovereign debt crisis. for the euro area, the euro has prevented this. the danish krone, on the other hand, was hit by short - term currency unrest in the autumn of 2008, as were other small currencies. subsequently, the sovereign debt crisis has, from time to time, led to pressure on the krone, but this has been upward pressure due to large capital inflows. a fixed - exchange - rate system is not in itself an effective bulwark against irresponsible policies. the euro area sovereign debt crisis could very well have taken a far more dramatic path, leading to disorderly sovereign defaults, without the variety of pan - european initiatives to solve the sovereign debt crisis that were the result of the economic - political cooperation between the euro area member states. bis central bankers ’ speeches the introduction of the euro back at the turn of the millennium caused interest rates to drop markedly in many euro area member states, and yield spreads within the euro area were all but eliminated. but the interest - rate gains were not used for consolidation. instead, they boosted domestic demand. as a result, competitiveness was eroded, and these member states saw increasing current - account imbalances. at the same time, housing bubbles emerged in several member states, and this later caused distress for the banks that had helped to fund property projects at inflated prices. the euro area systems for monitoring and addressing government deficits and other macroeconomic imbalances proved to be completely inadequate. this was one of the reasons why the imbalances were allowed to develop – and to become much more serious than they had been ahead of the crisis in the early 1990s. furthermore, risk premiums on the government bonds of these member states were unsustainably low for a long period after the introduction of the euro. hence market pressures for political action were correspondingly low. this changed abruptly when the financial crisis and sovereign debt crisis set in. since many countries had failed to take advantage of the favourable economic climate in the early years of this

currency will not necessarily be aligned with our macroeconomic conditions. fiscal policy then needs to step in. since its inception, government after government from across the political spectrum in denmark has supported the fixed exchange rate. one of those governments was headed by mr poul nyrup rasmussen, and i found it fascinating to listen to his recollections. economic principles are important for good economic policy decisions. but as poul reminded us, economics cannot be separated from politics. some of the policy decisions that poul and his colleagues took during the erm crisis 30 years ago continue to shape the economy and the institutions that we as central bank operate in today. a third important takeaway is that other monetary policy regimes can achieve strong outcomes. the panel discussion today illustrated that the key ingredient for monetary policy to achieve price stability is not the monetary anchor per se. rather, it is a commitment to a credible target for a nominal anchor and operational independence in achieving it that matter. page 2 of 7 the point was also emphasised by philip lane in his insightful comments on exchange rate systems in europe. credibility and commitment are the keys to success. once a nominal anchor is in place, credibility gradually builds, and economic structures adapt and reinforce the stability of the regime. as an example, our peg is central to wage bargaining. the peg also allows financial institutions such as our large pension funds to invest substantial parts of their portfolios in euro assets without worrying about exchange rate risks. this also implies that once a credible regime is in place, there are potentially substantial costs associated with switching from one regime to another. policy mix in a fixed exchange rate regime and implications of current inflation let me now turn to where we stand today. it is somewhat paradoxical to celebrate our policy regime in the current circumstances. inflation is currently at its highest since the inception of the fixed exchange rate regime some 40 years ago. until last year, my entire work life has been in the context of low inflation. i always found it a challenging and somewhat abstract exercise to explain why central banks worry about inflation. the reasons have now become very concrete. high inflation brings hardship to citizens who experience real incomes being eroded. high inflation makes everyday decisions more difficult, because relative and future prices and wages are unclear and uncertain as guides for economic decisions. this hurts growth. in addition, high unexpected inflation redistributes, arbitrarily, income from savers to borrowers. inflation is therefore currently the most important macroeconomic challenge we