challenges ahead a side effect of the three - year ltros is that the banking system in the euro area is now in a situation of abundant excess liquidity. “ excess liquidity ” ( defined as the difference between outstanding open market operations and the liquidity needs from autonomous factors and reserve requirements ) currently stands at around €800 billion and is expected to remain at roughly this level at least until the end of january 2013, when banks will be able to exercise the option of early repayment on the first three - year ltro. the leeway for a reduction in outstanding refinancing operations before that date currently amounts to around €100 billion, and the scale on which banks will exercise early repayment options is difficult to anticipate at the current juncture. as a consequence, the balance sheet of the eurosystem has grown to €3 trillion. this large increase is a symptom of malfunctioning money markets and reflects the fact that the eurosystem has replaced much interbank activity. when the situation stabilises and money markets go back to functioning normally, the balance sheet of the eurosystem will also go back to its normal size. to this respect, the eurosystem is often compared with other major central banks. such comparisons however disregard the initial size of balance sheets, as the eurosystem holds a large volume of assets that have nothing to do with monetary policy. in early march, the ratio of monetary policy instruments to regional gdp was 15 % for the eurosystem, 19 % for the federal reserve system and 21 % for the bank of england. this large amount of excess liquidity has drawn criticism of two different kinds. some observers have argued that since banks are re - depositing with the ecb large amounts of liquidity, the injected liquidity is not circulating within the system and therefore the ecb ’ s actions will be ineffective in preventing deflationary pressures. others, however, have warned that since these large amounts of excess reserves may remain in the system for a relatively long time, if they are not appropriately absorbed they will hamper the ecb ’ s ability to keep inflationary pressures in check. these fears are of course contradictory. in order to dispel them, let ’ s look more closely at the channels of transmission through which the excess liquidity circulates in the system. the first criticism – that large - scale use of the deposit facility demonstrates the ineffectiveness of ecb ’ s measures –

peter praet : heterogeneity in a monetary union : what have we learned? speech by peter praet, member of the executive board of the ecb, at the 14th ecb and its watchers conference, frankfurt am main, 15 june 2012. * * * i would like to thank maarten dossche and arthur saint - guilhem for their contribution to the preparation of this speech. it is a great pleasure to be speaking here today at what has, over the years, become a prime opportunity for the european central bank to exchange views with ecb watchers on the challenges faced by monetary policy in the euro area. my remarks today will focus on the question of how imbalances in terms of competitiveness and private and public sector debt have gradually led to a worrying degree of heterogeneity in the euro area. i will also highlight the effects of the ecb ’ s liquidity - providing operations, arguing that these contribute to more homogeneous financial conditions across the euro area and allow a smoother adjustment process during the transitional period needed in order to reabsorb accumulated imbalances. i will, however, also argue that these operations can only be regarded as temporary support, as the underlying structural problems and weaknesses require a truly structural response completing the overall architecture of emu. when the euro was first introduced, many critics claimed that emu would not work because euro area countries ’ business cycles and economic structures were not sufficiently similar. but does economic integration really need to imply economic uniformity? i do not think so. this can clearly be seen in the united states. regional economies are hit by different economic shocks and perform differently owing to their differing economic structures, even over extended periods. at the same time, institutional safeguards are required in order to ensure that heterogeneous developments do not become self - reinforcing and pose a threat to overall macroeconomic stability. here in the euro area, we have to acknowledge that economic conditions have, today, become increasingly heterogeneous. but let me state very clearly up front that this does not imply that a common currency cannot succeed in the euro area. to my mind, this means that we need to address the institutional shortcomings and weaknesses of emu in order to allow the euro area to cope with heterogeneous economic developments and large asymmetric shocks, as is the case in the united states. there, too, economic and monetary union did not occur