of smaller, export - oriented countries, while some peripheral countries are lagging behind, both in terms of gdp growth rates and of unemployment rates. although this divergence is of course worrisome, we should not immobilize ourselves by focusing on the problematic cases alone. if we do, we might forget that on average the performance of the eu economy was good – both during and after the crisis. the flexible way in which many countries reacted to the unexpected events was certainly facilitated by the past progress of european integration, which was accompanied by structural progress and an intensification bis central bankers ’ speeches of trade. the remaining divergence in economic development, however, is in my view a clear mandate to further reduce the institutional heterogeneity of economic governance. in order to shape the new institutional landscape in the best possible way, it is useful to look back for a moment and analyze the trends and conditions that made a crisis of this size possible. a correct account of the crisis period is not only important for economic historians. it is even more important for today ’ s policymakers as it enables them to identify the main weaknesses and to tackle them in an adequate way. in many respects the chronology of the recent contraction has followed the prototypical sequence of events characteristic for severe financial crises. the main preconditions were a number of slowly emerging disequilibriums on the real side of the economy, accompanied by suboptimal behavior and regulation in the financial sector. these real factors include, for example, the global imbalances that led to the “ paradox ” financial flows from emerging to advanced economies. this caused a relative abundance of available funds in the advanced economies, which was further amplified by a rapidly growing financial industry and a period of rather low global interest rates. these elements, among others, contributed to an increase in household indebtedness and to low private savings rates. the financial sector, on the other hand, was eager to satisfy the demand for apparently safe assets by designing and selling exotic products. at the same time, one could observe a deterioration of lending standards, excessive leverage ratios and the extension of management contracts that favored shortterm behavior and excessive risk - taking. in the financial crisis, all of these factors worked together to cause a massive fall in asset prices, a wave of fire sales and an almost complete breakdown of the interbank market. these turmoils in the financial market then led to a loss of confidence in the real sector and

and many eastern european, middle eastern and african countries. meanwhile, nearly one - third of all international debt securities are denominated in euro, and the euro accounts for about 25 % of global foreign exchange reserves. since its introduction, the euro has become the second most widely used currency in the world. moreover, with 646 billion banknotes and coins in circulation, the euro has already overtaken the us dollar. 1 in a global perspective the eu and the euro area are unique. no other model of supranational cooperation or agreement has achieved such a high level of integration. in the classification of the imf, the euro area is the 3rd largest economic area in the world in terms of real gdp ( 15 % ), after the us ( 20 % ) and developing asia ( 27 % ). moreover, following a few years of economic sluggishness, the euro area is now becoming an ever larger player in the global economy, thereby contributing to an urgently needed usd banknotes and coins : usd 810 bn = eur 615 bn ( all data and the exchange rate at end - 2006 ). rebalancing in global economic growth. economic activity, in fact, accelerated to 2. 7 % last year, and since the start of monetary union real gdp growth has averaged 2. 1 %. the ecb staff projections from march 2007 see growth ranging between 2. 1 % and 2. 9 % in 2007 and between 1. 9 % and 2. 9 % in 2008. unemployment has declined significantly, from 9 % in 1999 to 7. 2 % ( march 2007 ), a development which is particularly welcome. 12 million new jobs have been created since 1999. on average, inflation has stood at 2. 1 % since the start of emu, which shows that inflation expectations are firmly anchored. hence, price stability has created a favorable environment for investment and growth in the euro area. concerning the outlook for prices, the ecb staff projects annual inflation to average between 1. 5 % and 2. 1 % this year and between 1. 4 % and 2. 6 % in 2008. risks to the medium - term outlook for price stability remain on the upside, relating in particular to stronger than currently expected wage developments in a context of ongoing robust growth in employment and economic activity. given the vigorous monetary and credit growth in an environment of already ample liquidity, the governing council of the ecb will continue to be strongly vigilant in order to