. currently, adjustments are hard - handedly being enforced by the markets. in the said countries, ireland excepted, product and labour markets didn ’ t function properly and they still don ’ t. markets are overregulated and labour markets are highly inflexible. by addressing these problems, labour productivity can increase, thereby lowering unit labour costs. i am not saying this will be easy, but i ’ m convinced that such steps are absolutely necessary for emu to function properly. as the chart also shows, in the netherlands unit labour cost growth was also relatively high during the first years of emu. this, however, wasn ’ t caused by the high inflation rates and low flexibility of the labour market, but reflected the low unemployment rate in the netherlands in that period. bis central bankers ’ speeches for many years, the unemployment rate in the netherlands was the lowest in the euro area. the divergences in unit labour cost developments and price competitiveness within the euro area are reflected in the current account balances of the individual countries. as you can tell from chart 9, before the crisis, most southern european countries and, to a lesser extent, ireland experienced high and steadily increasing current account deficits, while the current account surpluses of germany and the netherlands improved further. for many years it was thought that in a monetary union, the current account balances of individual countries were no longer relevant. it was only the balance of payment of the euro area as a whole that mattered. we know better now. of course, besides competitiveness problems, the crisis also had fiscal causes. as can be told from chart 10, the stability and growth pact didn ’ t prevent some governments from taking up old habits once they had fulfilled the convergence criteria that enabled them to join emu. we shouldn ’ t forget, however, that this was facilitated by some of the core countries of emu. when it became clear that fiscal policies in these countries wouldn ’ t be able to meet the rules of the stability and growth pact, it was not the policies that were changed but the pact. this was clearly a mistake. besides, the gradual worsening of the budget balance in countries like italy and portugal was partly due to their competitiveness problems. since devaluing out of these problems was no longer an option, the declined competitiveness slowed down economic and employment growth. this dampened tax revenues while stimulating social security expenditures. looking at it this way, the lack of fiscal discipline partly reflected

fiscal compact, in which the political leaders of the euro area countries ( and most other eu countries ) further strengthened the rules governing budgetary discipline in europe. furthermore, in march the capacity of the efsf / esm will be evaluated. we have to conclude that the efsf in its current form ( based on guarantees ) and size unfortunately has failed to convince markets that all countries will get through this crisis unharmed. this is why we as central bankers call upon the european governments to increase the emergency facility as soon as possible. the ecb also took further measures to avoid the sovereign debt crisis from severely dragging down the real economy. it did so by introducing a refinancing operation with a maturity of three years. as chart 4 shows, this operation attracted a lot of interest, with a total volume of eur 490 billion ( right - hand side of the graph ). this is not all “ new ” liquidity by the way, since banks also rolled over operations with shorter maturities into this new facility. this provides them with the liquidity security they need in light of the market tensions and, thus, helps prevent a sharp reduction in credit supply to the economy. at the end of this month, a second three - year operation will be carried out. in analysing and solving the sovereign debt crisis, the focus was on fiscal and monetary factors rather than on the macroeconomic causes of the crisis. however, as i ’ ll briefly demonstrate by means of charts 5, 6 and 7, these causes are at least as important as the fiscal slippages some countries allowed themselves. at the start of emu, per capita income levels between countries differed significantly. it was assumed that catching - up countries would experience faster economic growth. this is what did happen, but not quite to the extent expected. prior to the crisis, mainly ireland, and to a lesser extent also greece and spain, showed signs of real convergence. their cumulative growth differentials compared to germany reached 20 to 45 % in 2007. note that italy and portugal hardly experienced any real convergence towards the german welfare level, even before to the crisis. even the netherlands “ converged ” more than these countries. bis central bankers ’ speeches unfortunately, the catching - up process largely took place through debt, either public or private. as chart 6 shows, in some countries credit to the private sector grew by more than 10 % a year for over a decade. as a result, their debt with the rest of the