Almost six years down the road since the start of the financial turmoil that turned into a crisis, many euro area countries have experienced a significant, but to date still partial, correction of external and domestic imbalances. Substantial progress can be seen most clearly in the development of current account balances. In the programme countries – Greece, Ireland and Portugal – current account balances have improved by more than 7 percentage points (relative to GDP) between 2008 and 2012. In Spain the current account has improved even more dramatically. Much of this was driven by an inevitable drop in domestic demand, but we have also seen strengthening exports in a global environment that is not really buoyant. This indicates that the countries’ efforts to rebalance their economies are starting to bear fruits. Part of this picture is also the partial reversal of previous losses of competitiveness, but here the pace of progress varies across countries. Ireland has performed very well, with accumulated unit labour costs falling by 18 percentage points relative to the euro area average. Greece, Portugal and Spain have seen a 10 percentage point relative improvement so far. In some other countries in need of strengthening competitiveness we are still waiting for the correction to become apparent. And in yet other countries, notably some of the countries that joined the euro area more recently, we have actually seen an incipient loss of competitiveness. It is important that these countries take a lesson from the mistakes of others. Fiscal balances have shown strong improvements.
Being in the hands of national authorities, banking supervision sometimes had a bias towards allowing more risk taking and credit growth in the supervised institutions that were operating in competition with banks from other jurisdictions. Consequently, there were cases when banks did not develop sufficient capital and loss buffers in good times, and they  BIS central bankers’ speeches  3  were not sufficiently discouraged from investing heavily in government bonds issued by their own home country. Again, I think you will agree with me that the root causes for the crisis – as I have described them – cannot be addressed by monetary policy instruments. At most, the central bank can foster a smooth adjustment. It must never lose sight of its primary mandate, maintaining price stability. And even if the central bank “buys time” for the governments, there is a risk that this will delay or postpone the actions that are needed in terms of fiscal consolidation and structural reforms. Let me give two examples: First, expectations that interest rates will remain low for a long time, and that abundant liquidity will be provided, might weaken the incentives for banks to downsize operations and repair their balance sheets. In the absence of a tough banking supervision they could delay the recognition of losses and keep non-performing loans on their books for longer than a realistic assessment of their profitability and viability would suggest. On the side of governments, the same expectations for low interest rates could weaken incentives to reduce public sector deficits.