But to set the stage, let me say very briefly that all the usual suspects were present: very strong capital inflows fuelling a credit and asset price boom that subsequently turned into a bubble at the same time as the economy overheated and an unsustainable external position developed, as could be seen in a double-digit current account deficit. And macroeconomic and prudential policies were not up to the task. Quite the contrary: there was a policy conflict between monetary policy and the demand levers pulled by the Government, and the risks inherent in capital flows, FX balance sheets, and credit and asset price booms were left under-regulated and insufficiently supervised. But as so often before in this country, we dealt more effectively with the crisis than the buildup. There were two key elements to this. The first was crisis management vis-à-vis the failing banks, as embodied in the Emergency Act submitted by Prime Minister Geir Haarde to Parliament shortly before the banks failed. The second was the economic programme developed by the Icelandic authorities in co-operation with the IMF. The programme had three key goals: stabilisation of the exchange rate, fiscal sustainability, and reconstruction of the financial sector.
First, because even though the current economic cycle is in a very robust phase today, it will come to an end at some point. If we have not armed ourselves with stronger economic instruments by that time, there is a risk that monetary policy will be overburdened. This is a well-founded German worry that as a central banker I share entirely; but it is for that very reason that I say to our German friends that they must aspire to an enhanced economic union. Second, because the absence of a genuine economic union is holding the euro area back, at a time when we must stimulate growth to catch up our past lag, particularly vis-àvis the United States, and address the radical technological transformation. The theme of this evening is “new ideas for Europe". But to have new ideas, we must begin by putting the old clichés that are paralysing the debate behind us. That is what I will begin by doing, before setting out my three new ideas for Europe. ** 1. Three old clichés that we must put behind us The first old cliché that emerges when we speak about reforming the euro area, is the idea – and a lazy idea at that – that economic union would be a substitute for national reforms. I would like to repeat right away that on the contrary, national reforms are a prerequisite for any enhancement of the Economic Union, and today, France is well aware of this.