jean - claude trichet : the ecb ’ s response to the recent tensions in financial markets speech by mr jean - claude trichet, president of the european central bank, at the 38th economics conference of the austrian national bank, vienna, 31 may 2010. * * * meine sehr verehrten damen und herren, ich danke den veranstaltern dieser konferenz recht herzlich fur die einladung zur 38. volkswirtschaftlichen tagung der oesterreichischen nationalbank. i would like to use the occasion of today ’ s conference to recall how the european central bank has reacted to the crisis and, in particular, put our most recent actions into this context. as i am sure you all appreciate, there is a single thread running through all of these actions, namely to ensure that we deliver on what we are expected to deliver : price stability across the euro area over the medium term. to those observers who have recently asked whether we have changed our orientation, i can only assure them that, on the contrary, it is the circumstances that have demanded special actions, and our orientation remains the same. as we all know, these are challenging times for europe and for the ecb. we are confronted with tensions in financial markets, a difficult fiscal situation in some parts of the euro area and an associated adverse impact on the effective functioning of monetary policy. the current tensions are the most recent repercussions of the financial crisis of 2007 and 2008, which culminated by the failure of lehman brothers in september 2008. after that, we saw a sharp fall in global economic activity, hitting the euro area and other advanced economies hard. in the fourth quarter of 2008 and the first quarter of 2009, global trade volumes fell by 18 percent, the gdp of the euro area fell by altogether almost 4. 5 percent and unemployment rose by 1. 4 percentage points in just six months. the ecb acted quickly and decisively in response to these circumstances. we reduced our key interest rates to unprecedented low levels and introduced a series of non - standard measures to support credit provision by banks to the euro area economy. this was essential at a time when the financial crisis had led to a virtual “ free fall ” in economic activity and severe problems in the money market were hampering the transmission of lower key ecb interest rates to money market and bank lending rates. our non - standard measures, which we refer to as

requirement would have. at the same time, we are developing our analysis of how monetary policy and indebtedness will affect the risks in the swedish economy in the coming period. i think that when making the actual decision, one must be sensitive to the difficulty of quantifying everything that needs to be taken into account. models cannot capture everything. one often sees forecasts as mean forecasts. this means in principle that the risk that the economy will develop less well is as great as the chance that it will develop better. a mean forecast for gdp growth abroad, for instance, balances everything that could give rise to lower growth against everything that could give rise to higher growth. another way of expressing the same thing is that the forecast is a form of middle way of all the different roads the economy could take in the coming period. this way of working with forecasts means that one acts as though one has succeeded in quantifying the possibilities and effects of all of the different potential courses of events. a year or so ago there were frequent discussions of the risk of a split or disintegration of the euro system – what was the probability that this would happen and what effects would it have for sweden? today there may be reason to ask these questions with regard to an escalation of the ukraine conflict or to a substantial fall in housing prices in sweden. if one considers these difficulties in quantifying various possible sequences of events and probabilities that they will occur, it may not be as simple a matter to make decisions on monetary policy and make forecasts for future interest rates as it is sometimes made out to be. it is not necessarily a case of assuming that one has succeeded in capturing all possible sequences of events in a balanced manner and then choosing the repo - rate path that provides the smallest deviations from the inflation target and a long - term sustainable development of employment during the forecast period. bis central bankers ’ speeches as my colleague stephen poloz at the bank of canada recently pointed out, the shaping of monetary policy is more a question of risk management than a precise feat of engineering. 3 if one takes the uncertainty seriously, and i think we have to do that, my assessment is that one should put particular emphasis on the really serious negative scenarios that we have the capacity to influence with monetary policy. one such risk that we have tried to take into account is that in a situation where macroprudential policy measures cannot manage all of the risks linked to household ind