the efficiency arising from technological advances. in this context, the knowledge of the linkages between monetary policy and financial stability is of particular importance. at the same time, we need to understand thoroughly how macro - prudential regulation and supervision interact with monetary policy. in particular, we need to understand how systemic risk and policies put in place to mitigate it may affect the transmission of monetary policy. i will first recall the market and policy failures brought to the surface by the crisis and argue that we need to address the fundamental causes of these failures. i will then describe what we know about the interaction between prudential regulation and supervision and monetary policy. at the same time, i will emphasise those mechanisms that are still less known. finally, i will suggest a way to proceed and to explore the new road lying ahead. lessons we have learned from the crisis before taking a new path, it is good to know exactly where we are and how we got there. so in order to define more clearly our possible upcoming tasks and challenges, let me first start by recalling briefly the sources and the amplification mechanisms of the recent financial crisis. ultimately the crisis was a combination of the accumulation of major imbalances in the years running up to the crisis with the incentives provided by the existing regulatory framework. low inflation, low interest rates and abundant liquidity prior to the crisis were conducive to an excessive accumulation of risk. banks and other investors had increased their appetite for risk and engaged in a “ search for yield ” supported by the exponential growth of complex and opaque financial products. the excessive risk - taking was also encouraged by the inadequate corporate governance of financial intermediaries and by regulations that did not keep up with the technological advances, also due to the emergence of a shadow banking system which was largely unregulated. when the crisis was triggered by the drop in the value of certain structured products, it quickly spread through interbank linkages, transforming it into a system - wide financial and economic crisis. in my view, the general lessons learnt from this experience are the following : first, the financial crisis has reminded us how important it is to look at the links and connections of the financial system. we saw that major disruptions such as the failure or near - failure of certain institutions rapidly spilled over to the whole financial system. therefore, the systemic nature of individual institution ’ s risk - taking has been largely underestimated. the consequences of this must be that macro - prudential

“ quantum leap ”, the radical improvement that i would like. europe, as an historic construction, has often been able to make radical progress during times of difficulty and crisis. the governing council of the ecb is ready – within the scope of its responsibilities – to help europe to make essential, new progress. this supposes of course that each of the european partners takes all its responsibilities which are, today, fully of a historic nature. would you like to be able to inspect member states ’ budgets prior to their adoption by national parliaments as the commission proposes to do? each institution has its own responsibilities. the ecb is very closely involved in the work of the commission and the eurogroup. i support the commission ’ s proposal, which i consider to be perfectly aligned with the goal of improving governance in the euro area. i have noticed some negative reactions, in particular in france, and i don ’ t understand this, especially in a country that has a tradition of favouring a strong “ economic governance ”. can non - democratically elected bodies grant themselves a supranational inspection right? the governments of the eurogroup all stem from a democratic process! they are the ones who, following any clarifications from the commission – and where necessary from the ecb – take the decisions. economic and monetary union includes a very close supervision and, when necessary, injunctions and sanctions imposed collectively by the governments participating in the union. we are interdependent, which means that bad management on the part of a single member leads to problems for all of the others. austerity plans are multiplying in europe but certain economists are warning against an overzealousness that could jeopardise growth. what is your view on this? when a household systematically spends more than it earns, so that its debt rises exponentially, its situation is clearly untenable. correcting this situation demonstrates both wise and sound judgment. it is also wise and sound judgment for a country to return to a sustainable fiscal situation in the medium term. there is a semantic issue here. what you call austerity plans i call plans for a progressive return to a sound fiscal situation. in any case these wise policies are favourable to growth since they increase the confidence of households, businesses and investors. today this confidence is – as i have said – essential for the recovery. the oecd has just raised its growth estimates for 2010 and 2011. do you share this view