No immediate consequences have been felt so far in the US debt market which remains the most liquid one and the ultimate benchmark for assessing risk. However, a pervasive uncertainty has been created, which might be responsible for the decline in confidence that has occurred over the last weeks. In Europe, on the contrary, sovereign credit risk has had immediate and dramatic consequences. It is difficult to foresee how, in the longer run, markets will assess debt sustainability. BIS central bankers’ speeches  1  But let me challenge some current analyses about debt sustainability in Europe. –  First competitiveness. In the UK, for instance, the effective real exchange rate has depreciated by 23% over the last four years and its exports have grown by a healthy 15%, year-to-year over the first semester of 2011. But Italy, Spain and Greece have done better, with exports growing respectively by 16%, 19% and 37% over the same period, with, of course, no internal exchange rate adjustment. Linking competitiveness with exchange rate depreciation is therefore too simplistic. Improving competitiveness can be achieved by proper domestic reforms with a lasting result. –  Second, the euro is the only major currency area with its external accounts in balance, which is a strong guarantee of long-term solvency. –  Third, the euro area’s aggregate budget deficit will stand at around 4.1% in 2011, less than half that of the UK or the US.
Emerging economies will enjoy  BIS central bankers’ speeches  3  sustainable growth in the years to come. Above all, in Europe, the community of nations are willing to face the extraordinary challenges they are confronted with and to build the lasting solutions needed towards greater integration within the Eurozone. Central banks are constantly cooperating in monitoring the situation and acting as they have done recently to provide dollar funding to international banks. This spirit of cohesion is a strong asset. It is deeply rooted in our dual role of preserving monetary and financial stability. BANQUE DE FRANCE is, for its part, strongly committed to overcome this challenge. Thank you. 4  BIS central bankers’ speeches