, production, which had already been stagnant due to weak consumption in the euro area, has declined further. however, with the pick - up in the global economy, there are indications of a halt in the deterioration of business sentiment – a leading economic indicator – and some positive developments in other economic indicators. even so, given that some peripheral european countries need to continue to implement fiscal austerity measures, the european economy as a whole is highly likely to remain sluggish for the time being. the fundamental cause of the european sovereign debt crisis and the current economic stagnation presumably lies in the imbalance between individual economies in the euro area. national currencies were unified into the single currency of the euro despite disparities in the economic strength of the countries involved, but sovereignties over fiscal and other national affairs have not been unified. in these circumstances, peripheral european countries experienced an economic boom, as their previously high interest rates converged toward the low level of germany ’ s interest rates following the currency union and their funding from bis central bankers ’ speeches global capital markets became easier at low cost. subsequently, peripheral european countries ran current account deficits, and their deficits were covered by investment and borrowing from the private sector mainly in the core euro area countries. moreover, peripheral countries allowed labor costs to rise, causing a widening gap in competitiveness with euro area countries that enjoyed high productivity, such as germany. the funding conditions have deteriorated for financial institutions in the peripheral european countries burdened with the debt problems, since the problems have worsened amid a global increase in awareness of credit risk arising from interbank funds transactions in the wake of the lehman shock. this implies that it has become difficult for peripheral european countries ’ current account deficits to continue to be financed with funds from other countries ’ private sectors. from 2011 through the first half of 2012, the debt problems in the euro area not only raised tensions in global financial markets but also exerted significant downward pressure on the global economy as a whole. since the latter half of 2012, however, the situation has shown signs of stabilizing reflecting the implementation of a number of measures to avert a crisis, as i mentioned earlier. nevertheless, since the economic imbalance in the euro area that lies at the root of the crisis has not yet been resolved, due attention should continue to be paid to the possibility that some events might cause a crisis to recur. i see the risks to the outlook for the european economy as still tilted

fluctuations : a perspective from time - series analysis ) ”, gendai keizaigaku no chouryuu ( contemporary trends in economics ), toyo keizai inc., 2011, pp. 35 – 65 ( available in japanese ). bis central bankers ’ speeches through an improvement in the income balance, the country ’ s net assets will increase, thereby exerting positive effects on consumption. 2. people ’ s inflation expectations : forward - looking expectation formation people ’ s inflation expectations have been rising on the whole. for example, in terms of shortterm inflation expectations such as those for fiscal 2013 or for a year ahead, many indicators – including the results of surveys conducted on households, economists, and market participants – show a gradual rise. medium - to long - term inflation expectations, such as for five and ten years ahead, are also rising, according to surveys conducted on economists ( chart 14 ). let me elaborate on how people form expectations of future inflation rates. generally speaking, there are two ways to predict economic variables. one is backward - looking expectation formation, where past results are directly used to form expectations. a typical example is that the inflation rate for the previous period is simply assumed as the expected future inflation rate. in this case, expectations for future inflation rates are fixed to actual past inflation rates. the other is forward - looking expectation formation, where future inflation rates are predicted in line with the underlying mechanism of future developments in economic activity. as an example, let us simply consider the phillips curve and assume that prices rise when economic activity improves. given this, when prospects for a sustainable improvement in economic activity are widely acknowledged in view of efforts to strengthen the foundations for economic growth and the spread of policy effects, people expect a rise in prices based on the relationship between economic activity and prices at a future point in time – in other words, inflation expectations will rise. meanwhile, in the corporate sector, better prospects for economic activity and sales will enable firms to ease price competition and pass higher costs on to selling prices. as a result, prices for the present period will likely incur upward pressure, thereby shifting the entire observed phillips curve upward, or making the curve steeper than before. in the actual formation of inflation expectations, aspects of both the backward - looking and forward - looking formations are considered to coexist. this is called hybrid - type expectation formation. based on past experiences, the aspect of backward - looking expectation formation is prominent in japan. on the