Member States’ individual discipline has therefore been too weak, and collective discipline, which was nonetheless provided for in the Stability and Growth Pact, was not applied in practice. I would like to recall the spirit of this Pact. It was designed to be the fiscal pillar of monetary union. It was based on a peer-review mechanism. But, on the one hand, it was deliberately misinterpreted: whereas countries were required to maintain a fiscal balance over the cycle, without  BIS central bankers’ speeches  1  breaching the 3% of GDP reference value for the annual public deficit, they interpreted this to mean: “we can constantly run a 3% deficit”. And, on the other hand, the Pact was not respected, as sanctions were not imposed on Member States that breached these rules (including France and Germany around 2002). 2. The second cause of this crisis lies in the competitiveness gaps that had widened for a long time before the crisis. The economic rationale is easy to understand: when joining a currency area whose goal is to achieve an inflation rate of just below 2%, changes in unit production costs must be in line with this central bank objective, modulo the productivity gains. In all countries that did not abide by this calculation and this discipline, year after year, there was a loss of competitiveness that ultimately proved very significant. As regards these budgetary slippages and competitiveness losses, I hasten to add that markets did not play their role.
In fact, to some extent, it has been replaced with a virtuous cycle. As financial markets have recovered, that has led to an improvement in business and consumer sentiment that, in turn, has helped to lift the economy, spurring further gains in financial asset prices. In the same way that the improvement in market conditions is helping to support a sustainable economic recovery, the fact that the recovery in economic activity is a world-wide phenomenon helps mitigate the risk of a so-called “double-dip.” The recovery in foreign demand should help to support the U.S. economy even if U.S. domestic demand grows more slowly than anticipated. Given these developments, the consensus forecast of about 3 percent annualized real GDP growth in the second half of the year appears reasonable. BIS Review 122/2009  1  However, I also suspect that the recovery will turn out to be moderate by historical standards. This is a disappointing outcome in that growth will likely not be strong enough to bring the unemployment rate – currently 9.8 percent – down quickly. I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. Peak to trough, home prices nationwide have declined by 11.5 percent measured by the FHFA (Federal Housing Finance Agency) index and by 32 percent according to the 20-city Case-Shiller index.