makes little sense. the two situations are completely dissimilar. spain is competitive. paradoxically, with the crisis, it is even more competitive than a year ago as the growth of its exports shows. it has serious problems to manage such as the situation of its banks, of its property developers and the indebtedness of its autonomous regions. but spain is taking the necessary measures : it is pushing through impressive reforms and reinventing its growth model. in your opinion, how did the euro area get into this situation? the euro area is not simply confronted with a financial crisis. it is facing a challenge : it must complete its construction. during the setting up of the euro area and subsequently during its first years of existence, governments acted with an inadequate sense of responsibility. its construction was incomplete. fiscal rules were not sufficiently strict and, moreover, they were often ignored. there was a form of cowardliness. governments preferred to close their eyes rather than to consolidate the edifice. none of the member states listened to the warning bells that were regularly sounded, notably by the ecb. at the same time, the markets also closed their eyes to the widening gaps within the euro area. once the single currency was in place, everyone found it convenient to disregard the area ’ s economic divergences and differences in competitiveness. the result is that today we have a monetary union zone, but the heterogeneity of its different economies has increased. what a mea culpa! it is not a mea culpa. the ecb and the governing council, of which i am a member, have never contributed to this indifference. on the contrary, over the last ten years we have signalled and highlighted these risks. however, neither markets nor governments took any notice. everyone benefited from what i would describe as an “ incredible ” decade, with interest rates decreasing for everyone across the board and certain countries posting exceptionally dynamic growth rates in an essentially inflation free environment. in that context, everyone got access to cheap debt financing relatively easily. the wake - up call is all the more painful today as a result. the financial crisis obliges us to completely rethink the european social model that is substantially state - financed. was europe ready for the single currency? the founding fathers of the euro, and particularly francois mitterrand and helmut kohl, imagined the euro as a major stimulus for greater european integration. they knew that it would require stronger european governance and the

and thus the output gap, we also look at alternative indicators of pressures in the economy. the wage gap measures the difference between actual wage growth and the growth that over time is consistent with the inflation target, and is an indicator of labour market tightness. with an estimate of 2 per cent productivity growth, wage growth of 4. 5 per cent over time will be consistent with an inflation target of 2. 5 per cent. in the chart, the wage gap up to 2000, i. e. before the introduction of the inflation target, is defined as the difference between wage growth in norway and in other countries. as we see from the chart, there appears to be a close relationship between this wage gap and the output gap as it is measured by norges bank. if we look at developments in employment in relation to trend growth ( measured as a percent of the population in employable age groups ), we get a similar path. norges bank has chosen, in keeping with ordinary practice, to use a smoothing parameter,? = 100 in the annual data. we also consider credit growth to be an indicator of public demand. growth in credit which over time deviates from growth in nominal gdp may indicate that the level of activity in the economy is higher or lower than normal. in addition, we monitor various cyclical indicators and acquire information from our regional network. 6 there is uncertainty associated with the estimation of both trend growth and the output gap, but the correspondence that seems to exist between the different methods of indicating pressures in the economy makes us confidant that the output gap, as we calculate it, provides useful information. the output gap provides an overview of the overall pressures in the real economy. if there are no substantial economic disturbances - or shocks - there will be no conflict between stabilising inflation and stabilising output and employment. a positive output gap will over time result in inflation that is above target, while a negative output gap will result in inflation that is too low. nor will demand shocks in a closed economy result in a conflict in the short term between price stability and stability in the real economy. a positive demand shock will result in higher inflation, and an appropriate monetary policy response would be to increase the interest rate as much as is necessary for output to return rapidly to its potential level. in an open economy, however, a conflict of objectives could arise in the short term following a demand shock. although a higher interest rate would contribute to stabilising both output and inflation