  The money markets are in much better shape as well: EURIBOR-OIS spreads have narrowed substantially, signalling a lowering of risk premia; the US money market funds seem to be re-opening access for euro area banks.   Tensions on sovereign debt markets have also eased: 10-year Italian bond rates have shed around 200bps since early December; Spanish rates have also decreased significantly in spite of recent renewed tensions.   Although at a low level, overall economic activity is stabilizing, as is bank lending. All these elements indicate a trend reversal. How has this come about? All of the players have proved their commitment and ability to restore stability. National authorities, especially in the most troubled countries, have taken far-reaching measures both to consolidate their public finances and to enhance long-term growth. The new Greek program has been launched. At the European level, a strong new fiscal compact has been agreed upon, as well as the rapid implementation of a powerful financial stability instrument. Banks are meeting their new capital requirements in an orderly way. And – I saved the best till last! – the Eurosystem has taken measures that have been absolutely decisive for this whole process to take place. Unquestionably, the steps already taken by the euro area to exit the crisis have been numerous and important. But recent market developments have reminded us that there is still a tremendous need for further demonstration of the determination of all the players in the European crisis to rise to the challenges facing us.
I will mention three of these challenges. BIS central bankers’ speeches  1  2. But challenges remain to be addressed. 2.1. The challenge for each individual euro country: achieving strong fiscal consolidation while ensuring long-term growth  The first challenge is the seeming dilemma between fiscal consolidation and long-term growth. One thing is very clear: this crisis is fundamentally a sovereign debt crisis; hence the priority in order to exit it once and for all must be a return to a sustainable fiscal path. In fact, an impressive effort has already been made. The Portuguese deficit shrank from around 10% in 2009 to around 6% last year. The Italian deficit has been reined in from 5.4% in 2009 to 3.9% in 2011, and Italy actually ran a primary surplus of 1% last year, which is very rare among developed economies. The French deficit has been cut from 7.5% in 2009 to 5.3% in 2011. If we look at the aggregate picture for the euro area, we see that it is the economic zone that has tackled fiscal consolidation with the greatest intensity and the best results. According to the IMF (January 2012 fiscal monitor), after peaking at 6.5% of GDP in 2009, the public deficit in the euro area started to decline in 2010 and stood at around 4% by the end of 2011 (down by 40%). Over the same period, the US deficit was reduced from 13% to 9.5% (down by 27%) and the UK deficit from 10.4% to 8.6% (down by 17%).