##sation would inevitably lead to higher inflation, with the well - known costs to economic prosperity. transfers between euro area member states would – particularly in the absence of far more rigid fiscal rules and sanction mechanisms at european level – risk creating significant moral hazard effects in the beneficiary countries, and would thus further undermine the long - term economic stability in the euro area. also, the ecb has long warned against the third option – the restructuring of sovereign debt in the euro area. the exchanging of debt, as in the case of greece, should remain a unique event. in this respect, it must be noted that the contagion effects of such measures are difficult to control, as has been demonstrated by the high volatility of financial markets over the past year. in addition, debt restructuring does not in itself address the underlying economic fiscal and structural imbalances. there is only one way of solving the sovereign debt crisis in the euro area countries : governments should pursue policies of strict fiscal consolidation and far - reaching structural reforms so as to address macroeconomic imbalances and return their countries to sustainable paths of growth. the ecb should support the adjustment process in the member states in the best manner possible, namely by providing price stability in the euro area as a whole. the ecb ’ s response to the crisis let me now address the measures taken by the ecb in response to the crisis, before turning to the response by the euro area governments. during the crisis, the ecb has been confronted with unprecedented threats to monetary stability in the euro area. broadly speaking, these have come from two sources : first, the deflationary forces stemming from the economic downturn and, second, the impairment of the transmission of its monetary policy, which reflected to the growing tensions in financial markets. the ecb had to react decisively to these challenges. first, we used our standard monetary policy measures to address the downward pressures on price stability that resulted from the sharp slowdown in economic activity in the crisis. in full consistency with our mandate, we reduced our key policy interest rate rapidly between october 2008 and may 2009, from 4. 25 % to 1 %. in other words, we reduced our policy rate faster than any euro area country has ever done in recent history. given that the ecb has ensured that inflation expectations in the euro area as a whole remain very solidly anchored, we have been able to maintain an accommodative monetary policy stance over the past four years

##s. second, they have to restore confidence in, and stability to, the european financial system. third, they must deal with the remaining shortcomings in the institutional design of emu. let me elaborate on these factors in turn. first, the rebalancing of the euro area economies requires, first and foremost, that public sector expenditure is brought back to a sustainable path and that the debt overhang is reduced. this is, of course, particularly true for those euro area countries that are currently under an eu / imf programme or are experiencing disruptions in their sovereign debt markets. much remains to be done, but we should not forget the steps that have already been taken – although there is no room for complacency. based on a direct estimation of revenue and spending ( rather than on the cyclically adjusted primary balance ), the cumulative fiscal consolidation achieved thus far is in excess of 10 % of gdp in each of the three countries under eu / imf programmes. while some countries have, most regrettably, fallen behind the targets in their programme, the consolidation efforts are significant in absolute terms. one of the reasons why countries did not reach their headline deficit targets is to be found in the economic headwinds they are experiencing. negative economic growth, higher interest bis central bankers ’ speeches payments and higher social security spending have led to quasi - automatic increases in expenditure and obscure the fiscal consolidation efforts. this stresses the importance of the implementation of well - designed and ambitious fiscal adjustment programmes being accompanied by growth - enhancing structural reforms. there is no doubt that the long - term effects of fiscal consolidation on growth and employment are positive and significant. whereas fiscal consolidation may have a dampening effect on economic activity in the short run, the extent to which it does so depends on several factors, such as the composition of the fiscal adjustment. national authorities need to set ambitious and credible targets, and to stick to them. even small deviations from the targets can quickly jeopardise the progress made and undermine confidence. to address imbalances, countries also need to take structural measures and deal with market rigidities. suitable structural reforms can have a positive impact on growth and employment already in the relatively short term, and can thus also help to mitigate the negative effects of consolidation. structural adjustment nevertheless remains difficult, but not impossible. this is proved by the experience in the federal republic of germany over the past years. losses in competitiveness after the reunification boom in the early 1990s were