s role ; my french student friends, however, could not possibly imagine a government institution performing a key sovereign task and still being outside parliamentary control. two very different world views were colliding. they have continued to do so in all political debates – essentially, up to the present day. where can you identify this? weidmann : i recently gave an interview to the french daily newspaper “ le monde ”. many readers responded to the substantive positioning, some positively, some negatively. however, some responded along the lines of “ why is he meddling in the political debate? he ’ s only a central bank governor, a “ civil servant ” who actually shouldn ’ t be saying anything on the matter. it was also the crisis of the european monetary system ( ems ) in 1992 and 1993 which showed just how different ideas of the central bank ’ s role within europe were in those days. schlesinger : german reunification meant that we were in a difficult position in 1990. the politically determined conversion rate of the east german mark caused a massive increase in the money stock to a size considerably larger than was justified by the former gdr ’ s potential output. in addition, wages were increased quickly, which obliterated the competitiveness of east german businesses. we had an inflation rate in excess of four per cent and needed to tighten monetary policy in germany. we succeeded, too ; however, our increase in interest rates did not sit well with some of our fellow members of the ems. they would rather have lowered rates, but could not do so owing to their currencies ’ peg to the d - mark. the proper action would have been to adjust the central rates : in other words, realignment. what was the reason for that not happening? schlesinger : the finance ministers seemed not to be listening. during the decisive negotiations, the central bankers were seated at the margins ; that was the role assigned to them. norman lamont, the uk chancellor of the exchequer and chairman of the ecofin council, then tried to force germany to lower its interest rates. he demanded that i personally – not the central bank council – lower interest rates that following monday. i then had to explain to him, first, that it was not possible, and second, we would not do that anyway. the following weeks saw very strong interventions against the italian lira, the portuguese escudo and the spanish peseta, and in the end, also against the pound sterling. instead

last few years have been challenging, many signs point to a silver lining. there has been significant progress in reforms with the results to show for it : on - track deficit reduction, falling unit labour costs, a positive current account and last but not least a return to positive growth. to sum it up : i am very much confident with regard to the irish case. and i am more and more convinced that we are witnessing a resurgence that is instructive for the euro area as a whole. the problems experienced by ireland are by no means confined to the “ green island ”, but are typical of what went wrong in the run - up to the crisis. thus, the reforms undertaken in ireland hold valuable lessons for the wider monetary union. but what exactly did go wrong at the onset of emu? bis central bankers ’ speeches 2. the origins of the crisis for many euro - area member states, the introduction of the euro ushered in a new era of abundant capital. in the case of ireland, for instance, capital inflows amounted to about two trillion euro between 1999 and 2008. in principle, this is exactly what standard economic reasoning predicts : capital was flowing from capital - rich to capital - poor economies, where returns should be higher. such flows complemented limited domestic saving in capital - poor countries and reduced their cost of capital, boosting investment and growth. as we all know, it did not always work that way. overblown financial sectors channeled the capital flows into unproductive investments. ireland is certainly a case in point as light - touch regulation and tax incentives encouraged the financial sector to balloon. overinvestment in real estate as well as in public and private consumption failed to boost productivity. unit labour costs soared, competitiveness declined, and rigid labour and product markets meant that this process gained additional momentum. when the financial crisis broke out in 2007, the vulnerabilities became apparent in ireland. growth imploded, deficits – which were often already too high before the crisis – exploded, and cracks in the irish banking system started to show. as an aside, you may recall that these cracks extended right into germany, where irish subsidiaries or special investment vehicles got their german parent companies into trouble. not surprisingly, investor sentiment began to shift, and also interest rates in your country started to rise sharply, triggering a major crisis that is still far from being resolved. how could it all go so wrong? key to understanding the crisis is the euro area