jean - claude trichet : the entry of estonia into the euro area speech by mr jean - claude trichet, president of the european central bank, at the euro conference at the bank of estonia, tallinn, 20 september 2010. * * * distinguished guests, ladies and gentlemen, it is a great pleasure for me to be here today, in tallinn, to participate in the euro conference. on 1 january 2011 the euro will become legal tender in estonia, and estonia will become the 17th country to join the euro area. let me first congratulate all parties involved in this outstanding achievement on their efforts and determination to prepare estonia for the adoption of the euro. the creation of the single currency has been a very important step forward in the achievement of the historical endeavour of creating a single market for the europeans, which was what the founding fathers had in mind more than fifty years ago. its inception has been, at the same time, a powerful symbol of the will of the european countries to pursue actively their strategic road towards unification. we were eleven countries when we started the euro on 1 january 1999. we will be seventeen on 1 january 2011. there is no better way to demonstrate that the euro area is not a “ closed shop ” but is open to those countries and economies that are fully compliant with the entry criteria in a convincing and sustainable manner. 1 january 2011 will become a landmark in the history of estonia, reflecting the long and challenging process of economic and monetary integration that has enabled estonia to join the euro area. after regaining independence in 1991, estonia embarked on a rapid and farreaching programme of social and economic reform. in addition to being a determined reformer, it became a model for stable multi - party democracy. estonia transformed itself into a dynamic economy, gaining recognition for its sound fiscal record, economic freedom and capacity to develop new technologies. for several years, estonia was also one the world ’ s fastest growing economies, but its growth was far from balanced. notwithstanding some very difficult years following its regaining of independence, estonia ’ s real gdp grew at an average rate of 7. 2 % per annum over the period from 1995 to 2007. however, this growth rate came to a halt in 2008. real output declined sharply in 2008 and 2009, and, after latvia, estonia became the second most severely affected eu member state in terms of output decline. the severity of the adjustment revealed that the period of rapid output growth was, to some extent, also a period of imbalanced growth and economic

the literature on sand piles, scheinkman and woodford ’ s ( 1994 ) model of inventory dynamics shows how small shocks may cause aggregate fluctuations. different states of the system, depending on its history. 3 many economic systems also exhibit forms of hysteresis or path dependence. for example, changing social attitudes towards personal bankruptcy, inflation or unemployment may affect equilibrium outcomes for those variables. 3. policy responses to unpredictability predicting the precise timing and dynamics of instability in all of these settings is very difficult. it is, however, possible to identify a sand pile or forest as being prone to large scale instability and determine the factors that contribute to that instability. analogously, many people, including at the bank of england, did identify the vulnerabilities of the financial system before the crisis without actually being able to predict when or how the crisis would begin. economists have been able to learn from other disciplines about how to cope with these types of instability. for example, insights from ecology and epidemiology have been applied to financial networks ( for more discussion, see haldane 2009 ), and economists have learned much from engineers about how to control dynamic systems. the key is for policymakers to focus on making the structure of the underlying system more robust to shocks. for example, in avalanche areas the snow may be “ seeded ” so that, by inducing small avalanches, the chance of a large avalanche is mitigated. and in fire - risk areas, controlled burns or fire breaks are sometimes used to limit the risk of a large fire. in the context of the financial system, policymakers could impose a “ glass - steagall ” style separation between the payments system network and risky activities. actions can also be taken to mitigate the impact of a bad outcome. for example, this might mean building an avalanche net or fence ; funding a fire - fighting service ; or launching a lifeboat. in the context of financial regulation, this might entail reducing the costs associated with resolving financial institutions, for example by requiring banks to develop resolution and recovery plans, or requiring forced subsidiarisation of foreign bank branches. as always, however, there is the risk that such interventions can have unintended consequences : shortly after the titanic sank, a steamer, the s. s. eastland, capsized on lake michigan, with the loss of around 850 lives, because it had been destabilised by the extra lifeboats required by post - titanic