Small changes in projections can have a huge impact on sustainability. Some of the implicit assumptions underlying current negative judgments seem to me seriously misguided. Let’s look first at the short run. As you know, we have been recently surprised on the upside with the dynamics of growth in the Euro area. Consumer confidence is almost back to pre crisis levels, PMI are at an all time high and GDP growth will almost certainly be above potential, on average, for the year 2011. Those developments take place at a moment where drastic fiscal consolidation programs are implemented in all countries. Those analysts who predicted that fiscal tightening would stifle growth in the Euro area are currently being proven wrong. Positive confidence effects in the private sector are outweighing the negative impact  BIS central bankers’ speeches  3  of public expenditure reduction. In our economic jargon, we seem to be living to day in a “Ricardian” world. What about countries in the periphery? Spanish growth rate swung from –3.7% in 2009 to –0.1% in 2010, despite the fact that a major austerity plan was being implemented. Spanish exports are booming with an increase of 10% within the euro area in 2010 and 19% outside the euro area in 2010. This compares very favourably with performances of other countries both inside and outside the eurozone. Turning to the long run, it is essential, when looking at the inner workings of the euro area to make a distinction between real and nominal evolutions.
Real convergence is occurring between various parts of the zone and I think this process will continue and support growth in the future, contrary to over simplistic descriptions. One overlooked fact is the very fast productivity catch up in the periphery of the euro area. Between 2000 and 2008, cumulative labor productivity growth in Greece, as measured by the output per employee, was 14,7%, and 10,2% in Ireland. Both significantly outpaced Germany (6,1%). This is exactly what you would expect in an integrated economic and monetary area and this process should continue in the future, provided that appropriate policies are implemented. Economic convergence will therefore boost growth and support the return to debt sustainability. Now, looking at nominal evolutions, a very different picture emerges. During the same period nominal wages grew by a total of 42% in Ireland and 52% in Greece vs only 7,4 % in Germany. The nature of the challenge, therefore, is clear. There has to be a regime change in the way nominal wages and prices are set in some parts of the euro area. As Central Bankers, we have been making that argument for years. One benefit of the crisis has been that this message is now fully accepted by Governments and public opinions. Strong reforms are currently being pushed in labor markets legislation as well as wage determination in the public sector in many countries. I’ll end up with a few words about the banking sector. I have the privilege to be both a Central Banker and a supervisor.