gertrude tumpel - gugerell : the financial crisis – looking back and the way forward speech by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, at the conference “ rien ne va plus? ways to rebuild the european social market economy ”, organised by the european economic and social committee and european trade union confederation, brussels, 22 january 2009. * * * ladies and gentlemen, 1 it is a great pleasure for me to speak here in brussels at the european economic and social committee conference. i would like to thank the organisers for their invitation and the opportunity to share with you some remarks on the current developments in financial markets and the response of the public authorities. we are facing a severe financial crisis. while the full economic consequences are still unknown, the declining pace of economic activity in the second half of 2008 and data from the labour market show that the real economy in the euro area as well as abroad is deeply affected. in the middle of this stormy and challenging situation there is still reason to be confident. the euro is now 10 years old. and it has shown to be a great success! since its introduction on 1 january 1999, the common currency has succeeded in maintaining price stability in the euro area. and most recently, it also had the chance to prove itself as a strong anchor, able to weather even the severe financial turbulence that we are experiencing. for example, by joining the euro area, its member countries eliminated the risk of exchange rate volatility between each other. and the stability of the euro area in this crisis seems to have attracted more support for euro area membership in european countries that have not adopted the euro yet. even if the current situation is far from benign, i believe it would have been more difficult without the euro. but let me now take a closer look at the developments in financial markets over the last months. i will then turn to the various ways in which we have addressed the challenges arising from the crisis. before i conclude, i will also explain to you what i think needs to be done in the coming months. 1. developments in financial markets the combined strength of the various shocks which have affected the global financial system since the outbreak of the financial turmoil in the summer of 2007 has been broadly unexpected. however, the crisis as such cannot be regarded as a complete surprise. it did not build up overnight but instead has developed gradually over several years. but what factors lie behind the current turmoil? the

where they have most effect on consumption and – in particular – investment. i put this stress on investment because, in our current circumstances, it is particularly important for monetary policy. investment increases demand today, which helps close the output gap and restore price stability. and it increases supply tomorrow, thus raising potential growth and allowing the equilibrium interest rate to rise. remember also that the investment shortfall during the crisis is at the core of the recent deterioration of our potential growth rate. for a fuller explanation of this point see speech by peter praet on “ price stability : a sinking will - o ’ - the - wisp? ”, washington, 16 april 2015. bis central bankers ’ speeches what ultimately matters for investment, however, is not market interest rates but the cost of capital – how much long - term interest rates feed through into in firms ’ and households ’ cost of borrowing. and this is where heterogeneity matters. as late as the middle of last year viable firms were still struggling to access finance in parts of the euro area. the percentage of financially constrained but viable smes 4 is estimated to have varied from around 1 % in germany and austria to a quarter of the sme population in spain and as much as a third in portugal. 5 in this context, between june and september last year we launched our credit easing package with the aim to remove these transmission blockages. it consisted of, first, our targeted long - term refinancing operations, which provide cheap long - term funding to banks on the condition that they expand loans to the real economy. and second, our purchases of asset - backed securities and covered bonds, which have a relatively tight link with credit extension to the private sector. at the same time, these measures were launched as the ecb ’ s comprehensive assessment of bank balance sheets was reaching its completion, which had led to banks frontloading their deleveraging and strengthening their balance sheets by over €200 billion in advance of the outcome. the new monetary policy impulse coming from these measures therefore arrived just as banks were in a stronger position to transmit it. however, as the credit easing package was being rolled out in the second half of last year, the inflation situation materially worsened in the euro area. and while the main driver was the sharp drop in global oil prices around that time, there were strong indications that this might not be a solely transitory development. our analysis showed that the persistence of low inflation across a range of statistical metrics