recent months may be easier for domestic public opinion to digest. but the lack of individual measures with respect to the overall size of the problem and market bis central bankers ’ speeches expectations may further prolong the uncertainty, as has happened in the past months. this may in turn increase the political cost of inaction. it is better at some point to take definitive measures that calm markets and convince them that the euro countries are indeed willing to do whatever is necessary to safeguard the financial stability of the area, as their governments have been claiming for months. one of the problems this crisis has shown is that the political authorities and the markets find it difficult to understand each other. on the one hand, markets do not understand why the governments of european countries are slow to adopt the necessary measures to solve problems, postponing decisions and creating uncertainty about their actual intentions. on the other hand, the political authorities often do not understand how the financial markets work ; they deeply despise them but at the same time depend on them to finance their budgets. they do not understand that announcements and good intentions are only valid in normal times, but when the crisis spreads the risk of losing credibility can only be limited with effective and timely action. they do not understand that market participants are looking for profit opportunities, and when they are offered one, they hurl themselves onto the next, in the expectation of making a similar gain. this phenomenon is the source of contagion. threatening the markets with retaliation and coercive measures often discourages the more stable, long - term investors, while it rewards speculators with short horizons. the long period the piecemeal approach followed in recent months risks losing sight of the long - term goal. the measures may not be completely coherent. we came close to it last autumn, with the franco - german proposal, endorsed by other countries, to make it easier for countries to go bankrupt. fortunately, the idea has not gained acceptance, not only because of the ecb ’ s dislike but also because of the devastating effect it has had on financial markets. it will take time to recover from the loss of credibility suffered by europe with that proposal. the proposal was based on the assumption that the best way to discipline governments and to ensure sounder public finances is to make it easier for a country to declare bankruptcy. as soon as a country has problems with its public finances, it should seek a restructuring of its debts or automatically extend its bond maturities as a necessary condition for receiving help

as we try to weigh the risk of an unduly sharp downturn, against the threat to inflation posed by a sharp surge in global energy prices. much will depend on developments in the rest of the world ; on whether the slump in the us housing market causes a sharp slowing in the wider us economy : and on how far this acts as a brake on demand – and inflationary pressures – in the rest of the world, especially asia and the euro area. the projections we published in last week ’ s inflation report were centred around a relatively mild slowdown, by historical standards – on the same scale as we experienced in 2005 – based on the assumption of a gradual and modest easing in interest rates over the next two years. but those projections are subject to a very wide margin of error – in both directions. the mpc ’ s monthly decisions are always grounded in a careful analysis of all the evidence. given the uncertainties we face, now is a time to pay extra attention to the emerging data. we can, and should, respond quickly and flexibly to early signs of the changing economic weather. according to most recent official economic statistics, the weather is still set fair. but we know fouler weather is brewing off shore. what is still far from clear is whether we are in for a force 6 strong breeze, or a full force 8 gale. we will need to deploy all our meteorological skills. in the inflation report we highlighted a number of early warning indicators on both output and inflation, which will help us judge the strength of the wind. these include the reports from our own agents around the country, drawing businesses such as your own. if you are one of our regular contacts, let me take this opportunity to thank you warmly on behalf of the mpc for your help. we may be making additional demands on you over the coming months. i hope my remarks tonight have helped to explain why your co operation is so necessary – and so valuable.