Importantly, the latest policy decisions remained fully in line with the ECB’s mandate and the principles I mentioned just now. Those who say that we were or still are “behind the curve” should consider all the decisions the ECB has taken since the financial crisis has intensified and broadened. In this respect, let us not forget that a central bank has only one instrument at hand, namely monetary policy. It cannot be held accountable for meeting more than one objective. Any such attempt would  2  BIS Review 139/2008  overburden monetary policy. For this reason, the Treaty provides for a clear and efficient allocation of policy responsibilities, with price stability being exclusively and primarily assigned to an independent ECB as its primary objective. Not surprisingly, our debates yesterday and today have triggered the question of how to safeguard EMU and build on its achievements at a time when the world’s financial landscape is changing dramatically. In fact, the current financial turmoil – the origins and implications of which we discussed in detail – is likely to dampen demand in the euro area and the rest of the world for quite some time. It may well turn out to be a litmus test for the functioning of EMU, both in economic and institutional terms. Having carefully listened to the presentations, I remain confident that monetary union will withstand the test of time. As illustrated during the conference, the euro has already brought real benefits to the 320 million people in the euro area.
Companies have been unable or unwilling to invest as a result of earlier investment mistakes and poorer prospects for the future. The banks have suffered severe credit losses, which has further intensified the recession, as their capacity to provide new credit has been limited. The situation becomes particularly serious when losses have led to acute bank crises, which has often been due to the banks being greatly exposed to a particular sector. For instance, it was an overheated property market with banks strongly exposed to this sector that was one of the main reasons behind the bank crises afflicting several countries – including Sweden – at the beginning of the 1990s. Adaptations to large financial imbalances have also put a burden on central government finances and increased uncertainty. This has in itself prolonged and intensified the crisis. Japan is a well-known example of what can follow in the tracks of a serious financial crisis if confidence cannot be recreated in economic policy and future growth potential. The consequences of financial imbalances have proved particularly serious in countries with a fixed exchange rate, partly because interest rates need to be kept high when confidence in the fixed exchange rate policy declines, and partly because there has often been a large foreign currency debt. When the fixed exchange rate has to be abandoned and the country's own currency is weakened, the burden of debt increases. Should the central bank then concern itself with asset prices?