In taking these initiatives, the Eurosystem has maintained a clear separation between monetary policy and financial stability operations. This clear separation has ensured that we kept fulfilling our primary mandate to safeguard price stability. My sense is that we have been successful. In the Euro area, at no time during the crisis have inflation expectations significantly deviated from our price stability objective. This was most crucial, when headline inflation stayed in negative territory, the output gap was strongly negative and the risks of deflation about to materialize. II. Financial stability cannot be achieved irrespective of fiscal conditions  11. Recent developments in Europe have proven that disorder in public finances could lead to disorder in financial systems. This did not come as a surprise. Central banks have  2  BIS Review 113/2010  long been concerned with fiscal positions in Euro area countries. Indeed, we, at the Banque de France, as well as many ECB members, have regularly called upon policy makers to pay due attention to debt dynamics. 12. Delay in addressing long-lasting fiscal imbalances is primarily responsible for the situation, but the financial crisis has exacerbated the problems. The first trigger was the mechanism of automatic stabilizers that resulted in rapidly declining fiscal receipts due to the synchronized recession. Secondly the imbalances have been aggravated by greater public spending via unprecedented fiscal stimuli plans and large public financial commitments, in particular via capital injection into the banking sector and debt guarantees schemes.
Public interventions have been massive to contain the scale of the turmoil but in return have implied a cost and led to a transfer of risk out of the banking sector onto the public sector balance sheet. For instance, interventions from European governments amounted to about 1800 billion EUR or 14% of the European GDP. 13. Let me also underline that – like in many previous financial crisis such as the Latin American ones – financial markets ignoring the long term risks of their investments helped accommodate unsustainable financing requirements of many countries. A major assumption underpinning our fiscal governance frameworks in Europe has been that markets would impose discipline earlier on. Experience reveals that this has not been the case: the market discipline was imposed, far too late. 14. All this emphasizes that sound fiscal frameworks are essential to sound financial regulatory frameworks. Indeed, no longer will be raised the question of the importance of the Stability and Growth Pact and the role it plays in anchoring market confidence. 15. Let me add how fiscal problems in Europe have been addressed. First, the Greek adjustment package, relying on IMF financing and conditionality plus bilateral loans has been decided. Beyond Greece, the European Financial Stabilization Facility provided the Euro area with massive resources to fight contagion risk within the area. Elsewhere in Europe, governments have embarked into sizeable fiscal consolidation efforts and in many cases have frontloaded their efforts. 16.