price stability is the main contribution of central banks to macro stability and, second, that central bank independence is a prerequisite for credibility. given the success in bringing the average and the volatility of inflation down and keeping it low, the period from the late 1980s until 2007 has been commonly coined the “ great moderation ”. low volatility of inflation went also hand in hand with comparatively low volatility of output and of several financial asset prices. after several years of low macroeconomic volatility, investors, consumers and policy makers, started to extrapolate those “ tranquil developments ” into the future. large macroeconomic or financial shocks were considered unlikely. in line with such a view of the world, risk assessment and risk pricing in financial markets were arguably subdued. this applied also to the pricing of euro area government securities, which was un - differentiated in the years before the crisis : notwithstanding considerably different fiscal positions, government bonds of different issuers displayed only minor differences in yields. it is interesting to note that already the founding fathers of emu foresaw that financial markets were unlikely to discipline governments towards sustainable levels of debt and deficits. 3 at the same time, it has always been clear that sound public finances are a pre - requisite for sustainable economic growth and positively interact with stability - oriented monetary policy, and vice versa. 4 accordingly, it was agreed in the design phase of emu that explicit rules would be necessary to avoid high levels of public debt and deficits. this view found its manifestation in the treaty, in particular through the prohibition of monetary financing and the no - bail - out clause. moreover, explicit fiscal rules, coupled with the idea of peer surveillance and sanctions, were further fostered by the stability and growth pact. however, despite these well - intended safeguards, we are facing the most severe sovereign debt crisis since world war ii. so, what went wrong? is the current state of public finances and the extreme levels of government bond yields in some euro area countries a result of irresponsible public spending? or are they due to the overreaction by financial markets? or, still, do they stem from the need of governments to deal with the financial crisis and provide support to the financial system? all of these three factors played a role – although to a different extent and to different degrees when we look across countries. as regards financial markets, there have in fact been situations of market dislocations as i remarked earlier

jean - claude trichet : interview with paris match interview of mr jean - claude trichet, president of the european central bank, conducted by ms elisabeth chavelet ( paris match ) on 7 december 2005 and published in the edition of paris match dated 15 - 21 december 2005. the publication of the translation was authorised by paris match. * * * paris match. after two uneventful years at the head of the ecb, in december you became embroiled in your first political storm. political leaders, economists, bosses and trade union representatives lined up to condemn the 0. 25 % increase in your headline rate on 1 december. they accuse you of threatening europe ’ s fragile recovery. has this manning of the barricades made you think again? jean - claude trichet. i would not say that the last two years have been uneventful. it has been necessary to safeguard price stability in a period made very difficult by the increase in oil prices. moreover, it is only to be expected in large and exemplary democracies that different opinions should be voiced. it is up to us to speak out tirelessly and marshal the most convincing arguments. that said, i believe that the public debate did not reflect the true feelings of the 311 million european and 60 million french citizens. all the indications are that that our fellow european citizens require us to be vigilant with regard to price stability and that they are not overly content with the situation as it stands. i would have preferred at least part of the public debate in europe and france to have focused on what our fellow citizens want. we believe that, by remaining faithful to our mandate – which is to safeguard price stability and preserve the euro ’ s purchasing power – we are doing what 311 million europeans require of us while, at the same time, by doing so we are supporting growth and job creation. p. m. many europeans label the euro a factor of inflation after seeing the price of a loaf of bread rise from five french francs to €1, an espresso from five french francs to €1. 20, or a scratchcard from ten french francs to €2. what do you think of this? j. - c. t. you are exaggerating the increase in the cost of a loaf or an espresso on 1 january 2002! in some economies, the idea that the euro is inflationary remains rooted in the collective consciousness because, at the time of the changeover to the single currency,