boosting corporate borrowing to finance ever larger mergers and acquisitions as well as leveraged buy - outs. likewise, generous tax deductions for mortgage interest payments, combined with public policy intervention to boost home ownership, may have contributed to a sharp growth in household debt in some countries. global economic challenges to tackle the threat of a debt trap three main approaches are generally discussed : fiscal consolidation to reduce the public fraction of debt, economic growth to increase the affordability of given liabilities, and inflation to lower the debt burden in real terms. fiscal consolidation decreases the vulnerability of public finance. and public finance is the water mouth of debt from all sectors in an economy in times of crisis. regardless of whether private debt has been socialized or the problem was from the beginning in public finances itself, the outcome was a drastic increase in the public debt burden. even john maynard keynes was aware of the limits of public expenditure based on borrowing has to its limits. after the great depression, keynes acknowledged : “ just as it was advisable for the government to incur debt during the slump, so for the same reasons it is now advisable that they should incline to the opposite policy. ” to bring public finances in order is of additional importance in mature economies where the demographic challenge kicks already in and might challenge the sustainability of established pension systems. growth should be stimulated. to this goal, structural reforms can strengthen confidence, market dynamics and job creation. higher competitiveness will increase the flexibility of the economy and lift the longer - term growth potential. in particular, rigidities on labour market should be removed to increase wage flexibility. structural reforms to increase competition in bis central bankers ’ speeches product markets, particularly in services and the privatisation of services currently provided by the public sector might further accelerate growth. to improve supply side conditions will also help to dampen the negative short term impacts on aggregate demand that kick it when the necessary fiscal consolidation measures are implemented. inflation, by contrast, is not a feasible option. this statement might not come as a surprise from a central banker. but there are sound reasons behind : 1. accelerated inflation would raise the risks of even higher future inflation and greater output volatility. uncontrollable wage - price spirals would be likely. 2. it would reduce incentives for governments to lower their public debt levels. 3. financial markets would probably not buy the story of, for instance, a temporary modest increase in the inflation target. rather they would add an inflation risk

yves mersch : amcham – principles versus rules speech by mr yves mersch, governor of the central bank of luxembourg, at a conference of alfi and the american chamber of commerce ( amcham ), luxembourg, 14 june 2007. * * * ladies and gentleman, i would like to thank alfi and american chamber of commerce ( amcham ) for inviting me to participate in this conference. i am sure that this conference will reveal interesting views on the topics regarding principles versus rules - based approach. we will surely return home with new insights and suggestions for further research and developments. through my own research, i observed, as underlined by one member of the us securities and exchange commission, that there is confusion as to the difference between rules and principles. principles are frequently defined as “ accepted and professed rules of action or conduct ”. this confusion about rules and principles leads me to approach this topic from different angles. 1. in my view, rules have the benefits of being precise and durable. further, they are widely accepted and adhered to by the industry and they generally achieve the sought objectives. finally a rule reflects the consensus of past situations and can only address circumstances known or anticipated by regulators at the time of implementation. thus, rules become outdated as circumstances change. while principles are characterized by less preciseness, they remain more durable and widely accepted. however, their implementation is weaker and thus leaves more room for judgment. the setting of principles may be more appropriate in a rapidly changing environment marked by financial innovation and growing cross - border financial activities. indeed, principles leave an open window to adapt judgments in case of changing circumstances and thus, need less frequent changes which would spread out confusion. but we have to be conscious that principles ought to lead to rules just like a constitution needs laws to be effective. the constitution of the soviet union, which was considered as one of the most democratic, went unheeded due to the gap in practice between this constitution and laws. 2. of course, there are differences between private and public rules, only the latter benefiting from the monopoly of forceful implementation. principles may also have private or public sources. therefore the question of rules versus principles is often addressed through the criteria of the degree of cooperation or responsibility of the private sector. but additional criteria can be added such as the implication of the private sector in the elaboration and implementation of rules or principles. this conducts to reduce the potential conflicts and improve the identification of regulatory objectives, and the effectiveness