However the unexpected referendum result in favour of leaving the EU has impinged strongly on the financial markets and it is still too early to gauge how the stability and recovery of the euro area will be affected. The global Great Recession and sovereign crisis combined to make the past decade that of the lowest growth of the euro area since the Second World War. It is what the International Monetary Fund has so graphically summarised with the expression “too slow for too long”. At the same time, inflation has remained far from the medium-term monetary policy target. The exceptionality and nature of the imbalances built up, particularly the high private and public indebtedness, not only hinder the ability of economies to grow and reduce their unemployment levels, but also limit the room for manoeuvre of countercyclical economic policies, at least within their conventional framework. This has led the European Central Bank to assume leadership in the response to the crisis. The magnitude of the structural challenges facing the euro area is notable. Some are due to design failures in the current operational framework of the Monetary Union and of the European Union itself, and others to the absence of a sufficient will to press for reform, all failures and absences that have eroded European citizens’ confidence in the integration process. Against this background, I would like to focus my comments on the difficulties facing economic policy as it attempts to put the euro area recovery on a firm footing.
In the fall and in early winter, the market also felt the weight of rapidly deteriorating global lending terms, which will undeniably support the Central Bank’s tightening measures and will reduce domestic demand and inflationary pressure, as was mentioned in the Board of Governors’ announcement of 14 February. It is possible that there will be a rapid drop in domestic demand as a result of high interest rates and a tightening credit supply. At this point, however, it is impossible to assert that this will be the case. Exactly when it will be possible to lower the policy rate will be determined by economic developments and outlook. Precipitate interest rate reductions would push inflation upward and standards of living downward. The suggestion that it is necessary to lower interest rates in order to control inflation is absurd. Indeed, it is astounding how carelessly many people seem to view inflation. Furthermore, it is appropriate to stress that the Central Bank believes it is impossible to choose between price stability and financial stability. If we were to relax our stance on price  BIS Review 25/2008  1  stability, it would surely undermine the credibility of monetary policy. Inflation – and no less important – inflation expectations would increase drastically, which could lead, in short order, to an upward spiral of prices and wages and falling exchange rate.