management approach to monetary policy. it allows for an early assessment and detection of potential imbalances. it sheds light on those risks at a longer time horizon than the one usually contemplated by monetary policy, but still relevant for the ultimate objective of price stability. this is of special significance and importance when financial imbalances build up in the economy, which are fueled by excess money or liquidity growth. unwinding of those imbalances can be brutal and discontinuous – the so called non linear reaction – and, as such, very destabilizing. empirical evidence suggests that asset booms have typically occurred when money and credit growth were above their long - term average. whatever the loss function and ultimate objectives of central bankers, all would agree that monetary policy should not willingly contribute to the formation of such credit and asset booms. to make best use of the informational role of money, however, we have to face numerous and increasing challenges one major difficulty is to identify in real time the nature of monetary developments and their implications for future price developments. the challenge of monetary analysis is to see through the noise in monetary data to recover those underlying trends which are relevant for monetary policy decisions. meeting this challenge has not been straightforward in recent years as the euro area economy was hit by several shocks : financial instability in the aftermath of the stock market collapse in 2000, exceptionally high economic and geopolitical uncertainty between 2001 and 2003, just to name a few. first of all, short - run monetary developments are often affected by transitory shocks. we need to identify and account for such temporary “ special factors ” or “ distortions ” that may affect monetary developments and blur their information content. to some extent it is the aim of the methodology developed at the ecb which allows for periodic adjustments to measured monetary aggregates in order to account for portfolio shifts which impact the demand for money without any incidence on future inflation. this approach has met with great success in the period 2000 - 2004. second, and more permanently, it is necessary to disentangle, in monetary and credit evolutions, those which reflect structural and permanent changes from those which simply result from moves in the level of interest rates and the position in the economic cycle. here, no mechanistic or ad hoc approach would do the trick. we need to look at the fundamental determinants of money demand. ideally, we should have a full and comprehensive model of portfolio allocation and choices which, as an aside, would produce

to give any credibility to a scenario that we consider unacceptable. however, there was full, total, and transparent disclosure of exposures to sovereigns for each in individual bank. everybody is free bis central bankers ’ speeches to make their own assumptions and calculations. with knowledge of the exposure, it does not take a rocket scientist to figure out some scenarios. it turns out that such calculations would produce very reassuring numbers. but, for some reasons, they never were publically made by most analysts. just as an illustration, the total exposure of french banks to sovereign debt in the southern part of europe is 38 % of total tier one ( 13 % without italy ). i ’ ll let you make your own conclusions. even in an apocalyptic scenario, only a small fraction of french banks tier one ratio would be compromised. the same results apply, with some variations, to other countries. conclusion let me know conclude. like all other major advanced economies, the euro area is facing big challenges in adjusting to the post - crisis environment. for all, those challenges relate to long term fiscal sustainability. they are neither bigger nor smaller for the euro area than for the us, uk or japan. they may be more complicated to solve because, by nature, our governance is more complex and we face specific collective action problems. it may take us longer to deal with difficulties as they appear, and we are paying a price for this relative inertia. but problems are being tackled, reforms are being implemented and i am convinced that, at the end, the euro area will emerge as a stronger and more robust entity than before the crisis. as for the european system of central banks, i can assure you that we stand ready to act as forcefully as necessary to ensure price stability and preserve the integrity of the euro, which is, today, our most precious common good. bis central bankers ’ speeches