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Lessons drawn from the crisis

Speech by Jean-Claude Trichet, President of the ECB,
at 150th Anniversary of the Central Bank
of the Russian Federation High-Level International Conference on
“Central Banks and Development of the World Economy:
New Challenges and a Look Ahead”, Moscow,18 June 2010

Dear Governors,

Ladies and Gentlemen,

It is a great pleasure for me to be here at the invitation of Chairman Ignatiev to celebrate the 150th Anniversary of the Central Bank of the Russian Federation with you today.

Chairman Ignatiev, your institution played a key role during the process of the Russian economy’s transition and the reform of its financial system. You and your staff have recently had many reasons for being proud: the Central Bank of Russia has been swift and efficient in its response to the global financial crisis. At the same time, inflationary pressures in Russia have recently abated. Therefore, on behalf of the ECB and the Eurosystem, let me congratulate you for your achievements.

Allow me also to use this occasion to stress that the Central Bank of Russia is a very important and appreciated partner in international fora such as the G20 process and the Financial Stability Board. The Central Bank of Russia has also developed a particularly close relationship with the ECB and the European System of Central Banks, mirroring the very close relations between Russia and the European Union that have just been strengthened further by a new “Partnership for Modernisation”. At the central bank level, we have established a regular dialogue between our institutions in the form of high-level seminars. At these events, we candidly exchange views on issues of mutual interest to central banks, including monetary policy and financial stability challenges that we face in our respective constituencies. It will be my pleasure to invite Chairman Ignatiev and his colleagues to our sixth seminar, which will be hosted by the ECB in Frankfurt in February 2011. Let me also point out that the Eurosystem and the Central Bank of Russia work closely together in the field of banking supervision and internal audit, under a TACIS II project that follows up on an earlier TACIS project implemented between 2003 and 2005. In the context of these projects, a dense network of reciprocal relations has developed between staff of the ECB and Eurosystem national central banks and staff of the Central Bank of the Russian Federation.


Ladies and Gentlemen, since the Central Bank of Russia can look back at a long and impressive history, please allow me to take a step back in time and quote from a letter Ludwig Stieglitz wrote to his son, Alexander Stieglitz, who was the first Governor of this institution from 1860 to 1866. Already at that time, he recognised that – I quote – “Money is not an end in itself – it is the blood circulation system of the economy.”

How relevant are such considerations from the past in today’s challenging economic and financial environment? In my view, two insights follow from these reflections.

First, as regards the idea that money should not be an end in itself, it is a reminder that the financial system is part of an economy’s services sector. The financial industry should serve the real economy. It must not become a self-referential system. One of its key functions is to manage risks. However, over the past decades, parts of the financial sector have moved away from this traditional role and have increasingly become a source of additional risks. Excessive emphasis on short term financial gains should be replaced by a sense of responsibility vis-à-vis the real economy. That is one of the lessons learned from the financial crisis, and is something that the ECB is taking to international fora, an issue to which I will return in a moment.

Second, as regards the circulation of money in the economy, our recent experience of financial crisis – with its roots in the evolution of bank balance sheets, and thus monetary and credit developments – has, in my view, highlighted the importance of a close and regular monitoring of monetary data. In the design of the ECB’s monetary policy strategy, it was always foreseen that the close monitoring of monetary developments would provide a framework for policy-makers to consider asset price developments and potential misalignments. Responding to monetary and credit dynamics within the scope of a comprehensive assessment of the risks to price stability in the medium term implies that interest rate decisions will tend to “lean against” accumulating financial imbalances and asset price misalignments. The further development of this framework promises to support financial and macroeconomic stability, within an overall strategy focused on the attainment of our primary objective of safeguarding price stability.


Price stability and the proper transmission of our monetary policy stance were our guiding principles when deciding on our recent emergency measures during the renewed tensions in financial markets in early May. These were triggered by a difficult fiscal situation in some parts of the euro area, although it must be borne in mind that the fiscal position of the euro area is, on average, more favourable in relative terms than that of most other advanced economies.

The current tensions mark the most recent reverberations of the financial crisis of 2007 and 2008, which had culminated in the failure of Lehman Brothers in September 2008. After that, we saw a sharp fall in global economic activity, which hit the euro area and other advanced economies hard. The ECB acted resolutely in response to these circumstances. We reduced our key interest rates to unprecedentedly low levels and introduced a series of non-standard measures to support banks’ provision of credit to the euro area economy. This was essential at a time when the financial crisis had led to a virtual “free fall” in economic activity and when severe problems in the money market were hampering the transmission of lower key ECB interest rates to both money market and bank lending rates. Our non-standard measures, which we refer to as “enhanced credit support”, were aimed at bolstering financing conditions and sustaining credit flows above and beyond what could be achieved through reductions in key ECB interest rates alone. The measures also protected us against possible deflationary developments and supported the focus on medium-term price stability.

In early May this year, at a time when we had already exited from some of our enhanced credit support measures, we were suddenly faced with renewed market tensions. This time, they erupted in a number of segments of the euro area’s debt securities markets. After very careful consideration of all implications of taking, or not taking, action, we decided to intervene in these markets with our Securities Markets Programme on 10 May.

Like all the other non-standard measures that we have taken, the Securities Markets Programme is time-bound in nature. It is aimed at ensuring the proper transmission of monetary policy impulses to the wider economy and, ultimately, to the general price level. To achieve our primary goal of ensuring price stability, monetary policy-making needs to be effective. In this respect, securities markets functioning as well as possible are necessary.

We have not gone beyond the goal of re-establishing the proper transmission of our monetary policy. We have not changed our monetary policy stance: we have maintained the current level of interest rates, a level that is, in our view, appropriate, and we have not moved towards more ample liquidity conditions. It is precisely to guarantee that the monetary policy stance remains unaffected that we are sterilising our interventions. This confirms and underpins our commitment to maintaining price stability, the objective we are inflexibly attached to. In this respect, let me emphasise that inflation expectations in the euro area have remained well-anchored in line with the Governing Council’s definition of price stability throughout the financial crisis. This is borne out by a range of indicators. In the results of the Survey of Professional Forecasters, for example, inflation five years ahead has continuously been expected to stand at either 1.9% or 2.0% since the beginning of 2002.

Let me also stress that the bond purchases made on the secondary market cannot be used to circumvent the fundamental principle of budgetary discipline. We have taken note of the commitments of euro area governments to take all the measures needed to meet their fiscal targets. We have also taken note of the precise additional commitments undertaken by some euro area governments to speed up fiscal consolidation and to ensure the sustainability of their public finances.

It is crucial that the governments rigorously implement the measures needed to ensure fiscal sustainability. Moreover, a key lesson to be learnt from this episode of turmoil is that the euro area needs to take a quantum leap forward to improve the effectiveness of its surveillance of fiscal and economic developments.


Ladies and Gentlemen,

Looking beyond the current situation in the euro area, let me share with you some broader lessons we can learn from the global financial crisis. First, we know with hindsight that financial innovation and too much complexity were important contributing factors during the build-up of the crisis. Second, too rapid overall credit growth should always be a warning signal for central banks in all advanced and emerging economies. Now, what should be done to address these and more general concerns about the size of the financial sector in the advanced economies and to prevent future crises? Let me mention just four key elements of what seems to be emerging as the consensus view in the global regulatory debate: we need (i) to broaden the scope of regulation to cover the whole spectrum of financial institutions, (ii) to mitigate the pro-cyclicality of the financial system, (iii) to enhance the transparency of financial markets and (iv) to change incentives in the financial industry.

In the European Union, such measures will be complemented by new institutions that focus on macro-prudential risks. In this context, a key initiative is the proposal for the establishment of a European Systemic Risk Board (ESRB), which will be supported analytically and logistically by the ECB. The ESRB will be an independent body responsible for conducting the macro-prudential oversight of the EU’s financial system as a whole.


Ladies and Gentlemen, dear fellow Governors,

I am convinced that our returning to the old wisdom expressed by the father of Alexander Stieglitz and ensuring that money does not become an end in itself and that it does not detach itself from the real economy, we will fulfil our function as anchors of stability and confidence. We have to live up to our responsibilities and deliver medium-term and stability-oriented policies in all systemically important economies around the globe. We at the ECB have been doing so by remaining faithful to our mandate.

I wish the Central Bank of Russia all the best as an anchor of stability in Russia at present and in the future.

Thank you for your attention.


European Central Bank

Directorate General Communications

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