,Parsed_Text,label
0,strong labour markets  with the unemployment rate still at the historically low level of 66 per cent in september  are likely to support higher wages,0
1,ecb staff analyses find that while participation rates of older workers have not yet returned to their prepandemic trend they are now comfortably above their prepandemic level,0
2,it found that households anticipate their real wages to fall by around 6 over the next twelve months slide 7 lefthand chart,0
3,in march the euro area unemployment rate and the unemployment to vacancies ratio  a broader measure of labour market slack  both fell to new record lows slide 10 lefthand side,0
4,at an aggregate level the ongoing reduction in the unemployment rate and the recovery in the labour force participation rate underline the overall improvement in the labour market,0
5,in february the euro area unemployment rate fell to yet another record low of 68 slide 4 lefthand side,0
6,the ratio of unemployed workers to job openings  a measure of labour market tightness  hit a new record low at the end of last year slide 4 righthand side,0
7,a labour market so tight at such an early stage of the recovery is a good predictor of strong future wage growth,0
8,relative to the size of the shock the unemployment rate in the euro area barely budged,0
9,recent analysis by the oecd quantifies the impact of higher job mobility on wage growth,0
10,the latest ecb staff macroeconomic projections foresee a substantial further decline of the euro area unemployment rate over 20222024 to levels not seen in decades,0
11,unemployment in the euro area has reached a record low and is at levels not seen since the 1970s,0
12,unemployment has also returned to its precrisis level of around 6,0
13,the last time the euro area6 saw unemployment rates at todays levels was in the 1970s,0
14,in december 2021 the unemployment rate stood already at 7,0
15,the unemployment rate is at a record low and below estimates of the nonaccelerating inflation rate of unemployment nairu while the participation rate is at a record high slide 5 righthand chart,0
16,chart 8 shows the evolution of the unemployment rate since 2014 while chart 9 shows the evolution of projected unemployment during the pandemic,0
17,chart 8 and 9 show that the labour market has turned out to be stronger than was expected during the pandemic and that the latest staff projections postulate a significant further decline of the unemployment rate over 20222024 to a level of 66 per cent toward the end of this horizon,0
18,of course while these charts focus on the unemployment rate it is always essential to take into account a wider set of indicators of labour market slack especially in view of the role of pandemicrelated labour market policies that might distort for longer the relation between the measured unemployment rate and the overall degree of labour market tightness,0
19,3   chart 8 unemployment rate in the euro area  percentages of the labour force   sources eurostat and december 2021 ecbeurosystem staff projections,0
20,the crisis left deep socioeconomic scars on millions of young people who faced the most precarious job market in decades,0
21,as many workers in job retention schemes do actually work the figures on employment include some of the workers covered by job retention schemes,0
22,the beveridge curve captures the negative relationship between the unemployment rate and the job vacancy rate,0
23,the unemployment rate declined from 81 in april to 74 in september  the same level as in february 2020 before the pandemic hit the global economy slide 2 righthand chart,0
24,9 for comparison after the great financial crisis the unemployment rate rose by well over 4 percentage points in both,0
25,it should be noted however that the unemployment rate alone does not summarise labour market dynamics,0
26,1 estimates of structural unemployment were consistently revised down as the economy strengthened,0
27,this is good news for the economy but it also means that we expect unemployment to fall below its precrisis level only in the second quarter of 2023 and wages to grow only moderately,0
28,in 2013 the european commission estimated that structural unemployment measured by the nonaccelerating wage rate of unemployment nawru in the euro area would rise to 116 in 2015,0
29,should unemployment rise more forcefully in response to the structural changes unleashed by the pandemic the increase in wage growth needed to underpin demand could be weaker than currently projected,0
30,unemployment is not expected to return to its precrisis level until the end of 2023  and in any case this was not a level that delivered strong wage pressures before the pandemic,0
31,for example job retention schemes are playing a major role in cushioning unemployment the share of workers who are unemployed discouraged or enrolled in such schemes is around double the headline unemployment rate chart 8 left panel,0
32,for example a 1 percentage point narrowing of the overall unemployment gap in the euro area reduces the unemployment rate of lowskilled workers by 13 percentage points more than the unemployment rate of highskilled workers,0
33,extending the methodology in this paper to the euro area ecb analysis finds that a narrowing of the unemployment gap actual unemployment minus the estimated nonaccelerating wage rate of unemployment benefits less advantaged groups more,0
34,younger households have been drawing more on their savings as their situation has worsened whereas older households have been setting aside more chart 1,0
35,in 2013 the european commission estimated that structural unemployment measured by the nonaccelerating wage rate of unemployment nawru in the euro area would rise to 116 in 2015 owing in part to supposed skill mismatch,0
36,in the united states for example the length of unemployment benefits automatically increases as soon as the unemployment rate exceeds a certain threshold,0
37,only around a third of those individuals who completed fulltime education at the age of 15 or younger are monetary union supporters,0
38,the euro area sovereign debt crisis has painfully demonstrated that such conditions can shift a disproportionate share of the macroeconomic adjustment burden onto workers either through falling nominal wages or higher unemployment when wages are too sticky to adjust,0
39,so far government support measures particularly shorttime work schemes have protected households against job losses and a drop in incomes,0
40,but this has not prevented unemployment from spiking in some countries,0
41,this is so far different from the postlehman period when the drop in employment was matched by a rise in unemployment,0
42,4  in this environment many households are uncertain about future employment and wage dynamics motivating them to save more for precautionary purposes,0
43,this partly results from a drop in labour market participation given that some individuals currently do not actively seek employment due to social distancing rules or childcare duties,0
44,nevertheless due to these measures a considerable increase in unemployment was most likely averted in all countries,0
45,figure 8 unemployment rate and share of workers in job retention schemes,0
46,while the various jobretention schemes introduced by governments have so far been effective in cushioning the fall in income and preventing a more precipitous decline in employment and the numbers of people enrolled in those schemes are falling as activity picks up keeping job support schemes in place is critical to avoid a sharp increase in unemployment later in the year,0
47,according to ecb estimates the euro area unemployment rate could exceed 10 in the third quarter,0
48,and if the most severe scenarios for growth materialise employment could fall significantly over the coming years presenting a serious risk of rising structural unemployment,0
49,if headline unemployment figures were adjusted for people who are temporarily not working and are being subsidised under government schemes unemployment rates could be up to two to three times higher than the headline rate in several countries,0
50,the unemployment rate in the euro area for example will likely still be noticeably higher in two years than predicted before the crisis slide 2 right,0
51,the decline in unemployment and the tightening of labour markets have further increased labour cost pressures,0
52,according to eurostats flash estimates in the fourth quarter of 2019 employment expanded by 03 quarteronquarter while unemployment declined further to 74 in december the lowest level since may 2008,0
53,with the decline in unemployment and the tightening of labour markets labour cost pressures have strengthened,0
54,as a result an insufficiently positive inflation rate means that a negative areawide shock is more likely to result in higher unemployment than a smooth adjustment in real wages,0
55,and the workingage population in the euro area has for some time even been in decline,0
56,euro area unemployment at 74 is at its lowest level since may 2008,0
57,the unemployment rate stands at 74 its lowest since july 2008,0
58,15  ltv limits increase the resilience of the household sector reducing the risk of households finding themselves with negative equity if housing prices fall,0
59,4  and broader measures of unemployment that include for example involuntary parttime work remain well above headline unemployment,0
60,such differences not only matter for understanding how different types of households react differently to economic shocks evidence suggests that changes in the composition of the workforce can help explaining euro area wage growth at the aggregate level,0
61,5 the explanation is that lowincome households are substantially more likely to be unemployed at any point in time it follows that this group is more likely to benefit from the employment creation triggered by a monetary expansion,0
62,similarly the elasticity of labour income in relation to changes in aggregate gdp growth is significantly higher for workers in lowerincome households,0
63,this channel is heavily skewed towards lowerincome households who also tend to benefit disproportionately from a stronger labour market,0
64,unemployment in the euro area has practically receded to precrisis levels,0
65,as a consequence unemployment in some countries in particular among young people remains unacceptably high despite the progress made at the euro area level on average,0
66,over the same period the annual growth rate of the workingage population has fallen from over 1 percent to zero and is projected to turn negative chart 12,0
67,does workers bargaining power depend on traditional narrow measures of unemployment or on broader ones including underemployment,0
68,at the same time the unemployment rate in the euro area has continued its downward trend falling to its lowest level since may 2008,0
69,low short rates however also benefit savers like all other households via an indirect effect  that is the reduction in their unemployment rate and the increase in their labour income,0
70,in addition through the reduction of the unemployment rate of poorer households the indirect effect reduced income inequality,0
71,focusing on the labour market alone there is evidence that countries that implemented reforms directly after the crisis have seen both cyclical and structural unemployment go down,0
72,policies to encourage more people especially older workers to participate in the labour force can help raise rates,0
73,1 by 2013 unemployment had risen by 10 million and eu gdp was some 13 below its precrisis trend,0
74,in addition to the wage dynamics i just mentioned we have observed the unemployment rate moving close to its precrisis low with participation rates being higher than ever,0
75,second and more fundamentally the natural rate of unemployment is unobservable,0
76,10  conclusion to sum up the current low unemployment rate and the recent wage increases do not necessarily imply that higher inflation is around the corner,0
77,the unemployment rate in the euro area was 75 in july this year the lowest level since july 2008,0
78,employment is still increasing the number of people employed has risen by 112 million since the employment trough in mid2013,0
79,the unemployment rate stands at 75 percent its lowest level since july 2008,0
80,although the results need to be treated with caution given the short sample a wage phillips curve regression using household inflation expectations would have provided the best outofsample fit for euro area wage growth over the course of last year,0
81,labour market dynamics remain robust with unemployment at 76 in april the lowest level since august 2008,0
82,moreover households financial situation continues to strengthen in line with further declines in unemployment which supports private consumption,0
83,furthermore euro area unemployment came in at 76 in april the lowest since august 2008,0
84,the euro area unemployment rate currently stands at its lowest level in more than a decade and the wage increases that result from tightening labour markets should continue to underpin household income and private consumption,0
85,take unemployment which has a particularly negative effect on household income for obvious reasons,0
86,as a result the unemployment rate fell from around 12 in early 2014 to 78 in january this year the lowest level in ten years,0
87,but even so youth unemployment remains twice as high as the total unemployment rate,0
88,even before the crisis nearly one in five people aged 15 to 24 was unemployed,0
89,strikingly much of the fall in youth unemployment during the recovery reflected a shrinking young labour force rather than strong employment growth,0
90,since the 1990s social mobility has slowed across the oecd meaning that those in lower income groups have less chance of moving up the ladder,0
91,the social implications of high unemployment for young people are already concerning,0
92,as the young have suffered disproportionately from unemployment in the aftermath of the crisis their risk of poverty has risen significantly,0
93,the rising risk of youth poverty also reflects the design of existing welfare systems which remain tailored to traditional labour markets,0
94,at the same time the eligibility criteria for unemployment benefits remain largely based on factors that disproportionately benefit older workers such as the duration of employment,0
95,there is a significant gap across generations when it comes to recipients of unemployment benefits in the eu,0
96,not all young people have been affected in the same way of course but high youth unemployment and deteriorating economic conditions more generally are something that concern us all not least because they affect social cohesion and could threaten to undermine the european project,0
97,labour market dynamics remain strong with euro area unemployment at 79 in december its lowest level in more than ten years,0
98,the results of their and their representatives determination have been tangible 22 consecutive quarters of economic growth the unemployment rate at its lowest level since october 2008 and wages and incomes on the rise,0
99,the unemployment rate has declined to 79 its lowest level since october 2008,0
100,improving the functioning of the labour market is still an outstanding issue  more than 3 million people remain unemployed and the youth unemployment rate is still above 30,0
101,unemployment rose from 26 in 1973 to 92 in 1985 for the euro area 12,0
102,the unemployment rate declined to 81 in september 2018 which is the lowest level observed since late 2008 and employment continued to increase in the third quarter,0
103,unemployment has been falling too and now stands well below the euro area average,0
104,the tradeoff between unemployment and inflation disappeared,0
105,but there was no fall in unemployment which varied between 4 and 9,0
106,in fact inflation and unemployment had a tendency to rise in tandem,0
107,in other words lower levels of unemployment would not necessarily lead to faster wage increases,0
108,18  furthermore while some savers have seen their financial income reduced by lower interest rates asset purchases have at the same time triggered both a sizeable reduction in unemployment and wage increases for the employed,0
109,euro area unemployment declined to 81 in august its lowest level in almost ten years,0
110,more than two million jobs have been created since the end of 2013 and the unemployment rate has fallen from a peak of more than 26 to 15,0
111,spains unemployment rate remains well above precrisis levels and is roughly the double of the euro area rate,0
112,this situation calls for further reforms to address the duality of the labour market and more effective active labour market policies to reintegrate young people and the longterm unemployed,0
113,the unemployment rate in the euro area has dropped to its lowest level since 2008 and the number of people in employment has increased by more than nine million since mid2013,0
114,there are now 92 million more people employed in the euro area than at the lowpoint in mid2013 and the unemployment rate is at its lowest level for almost a decade,0
115,the unemployment rate fell to 81 in august 2018 its lowest level in ten years,0
116,for example although in the euro area as a whole the recent rise in employment more than compensated for the decline since the crisis the unemployment rate here in centreval de loire increased from 55 in 2008 to 86 last year according to eurostat,0
117,with the help of this programme more than 1500 unemployed young people who here in the centre region have lower qualifications than the national average could already return to education gain a qualification or are now in employment,0
118,this is reflected in the unemployment rate in the euro area which stood at 82 in july,0
119,on the back of the economic expansion which has been underpinned by our monetary policy all of the job losses recorded during the crisis have been recovered and the unemployment rate is at its lowest level for nearly nine years,0
120,moreover narrow unemployment measures are likely to understate the prevailing degree of underemployment,0
121,unemployment in the european community had continually risen from 58 in 1980 to 112 in 1985,0
122,euro area unemployment declined to 82 in july the lowest level in almost ten years,0
123,this is particularly relevant in spain where unemployment declined by almost 11 percentage points from the peak of the crisis to 154 currently,0
124,lower unemployment not only pushes up the disposable income of those who find a job but also reduces the perceived risk of job loss giving workers less incentive to hold precautionary savings,0
125,the unemployment rate stood at 84 in may its lowest level since december 2008 and labour force participation now stands at an alltime high,0
126,furthermore unemployment is at its lowest level since december 2008 despite an increase in the labour force of more than 2,0
127,the unemployment rate is at its lowest level in almost ten years while the number of people employed in the euro area has increased by some eight and a half million since mid2013,0
128,the labour force participation rate in the euro area has risen by 15 percentage points since the crisis and now stands at an alltime high,0
129,also the unemployment rate is at its lowest level for nearly nine years despite an increase in the labour force of more than 2,0
130,measures of slack such as the u6 measure of unemployment also show improvement,0
131,6the u6 measure captures unemployment underemployment ie,0
132,the unemployment rate for instance is based on a narrow definition,0
133,after all unemployment is much higher among those with low incomes than among those with high incomes,0
134,the unemployment rate is at its lowest level since december 2008 despite an increase in the labour force of more than 2,0
135,when looking at slack over the past few years it is also worth considering alternative measures of unemployment,0
136,the u6 measure for example captures unemployment underemployment meaning workers who would like to work more hours and marginal attachment namely those workers who are not competing very actively in the labour market for example because they are not available to start a new job at short notice,0
137,ongoing work at the ecb suggests that the decline in unemployment that followed the introduction of the app had a disproportionately positive impact on lowincome households,0
138,u6 which is at 16 for euro area instead of the usual measure of unemployment standing at 8,0
139,overall this evidence suggests that the shifts in unemployment rates observed since 2007 were mostly triggered by the macroeconomic cycle and not by an increase of structural unemployment as allegedly indicated by very high nairu levels,0
140,growth in the initial years was strong and unemployment declined by more than a fourth within five years,0
141,the unemployment rate in the euro area has dropped to its lowest level since 2008 while the number of people employed has increased by almost eight million since mid2013,0
142,since these workers remained attached to the labour market they represented a broader definition of slack rather than a new category of structurally unemployed workers  and indeed measuring slack in this way helps explain recent low inflation outcomes better,0
143,14  but as i showed before current estimates of structural unemployment do indeed confirm that the initial revisions were exaggerating the impact the recession would have on labour force participation,0
144,and they might currently exaggerate the impact the current expansion might have on lowering structural unemployment,0
145,it would be quite a stretch to claim that the euro area has been in such a highpressure economy up to now that would explain the recent notable downward revisions in structural unemployment,0
146,the structural unemployment is the natural rate of unemployment that the economy would settle at in the long run in the absence of shocks,0
147,the amount of unemployed people in the labour market was bigger than what was measured at the time,0
148,the unemployment gap  a measure of labour market overcapacity  now seems to have closed  although it has again been revised downwards and employment in the euro area is higher than it has ever been,0
149,in practice we are seeing positive signs in fact the difference between the overall unemployment rate and broader measures of slack on the labour market has declined somewhat over the past two years,0
150,the unemployment rate is the lowest since december 2008 despite a 2 increase in the labour force in that time,0
151,we project that unemployment will fall to 72 by 2020,0
152,the unexplained residuals in the model  which in the past were sizeable  are diminishing suggesting the link between unemployment and wages should improve,0
153,the unemployment rate continues to decline and now stands at close to a nineyear low of 87 down by 33 percentage points from its highest level,0
154,additionally the unemployment rate is now at its lowest level for around nine years and continues to decline despite an increase in labour force participation,0
155,the socalled u6 measure captures unemployment underemployment meaning workers who would like to work more hours and marginal attachment which refers to those members of the workforce who are not seeking employment very actively either because for example they are not available to start a new job at short notice or have been discouraged by a fruitless search for work,0
156,the u6 measure currently covers around 17 of the labour force and is thus considerably higher than the unemployment rate,0
157,annual growth in employment has reached its highest level since before the crisis and the unemployment rate fell to 87 in november the lowest rate for nearly nine years,0
158,the unemployment gap  an established measure of labour market slack  is now closed and employment has reached its highest ever level in the euro area,0
159,indeed the difference between the headline unemployment rate and broader measures of labour market slack has already edged down in the past two years,0
160,4 along similar lines the spanish labour market reform is found to have increased the likelihood of exiting from unemployment to employment while the direct transition from temporary to permanent positions is also eased by the reform,0
161,the impact of the 2012 spanish labour market reform on unemployment inflows and outflows a regression discontinuity analysis using duration models,0
162,the number of people unemployed in the euro area declined from 186 million in the second quarter of 2014 to 146 million in the last quarter,0
163,employment in the euro area has reached its highest level ever while unemployment has fallen to its lowest rate since january 2009,0
164,the fact that unemployment has fallen so much while labour participation has been rising is a remarkable success story,0
165,additionally the unemployment rate is now at its lowest level in eight years and continues to decline notwithstanding an increase in labour force participation,0
166,the socalled u6 measure captures unemployment underemployment meaning workers who would like to work more hours and marginal attachment namely those workers that are not competing very actively in the labour market for example because they are not available to start a new job at short notice,0
167,this measure currently covers just below 18 of the labour force and is thus considerably higher than the unemployment rate,0
168,despite the unemployment rate still being too high almost 7 million more people are now employed in the euro area than in mid2013 which implies that the employment losses recorded during the crisis have been offset,0
169,moreover unemployment rates have receded almost everywhere across the euro area,0
170,despite the fact that unemployment is still too high in some countries notably as regards young people it is worth mentioning that it came down the most in several of those countries where it had previously been especially high,0
171,at the same time the present unemployment rate is the lowest in the last 37 years and is well below the european average,0
172,unemployment rates have indeed come down but in particular the number of young and longterm unemployed is still unacceptably high,0
173,gdp per capita rebounded faster and unemployment fell more,0
174,2 these reforms also seem to have made unemployment more responsive to growth,0
175,this ended up disproportionately penalising young people who had weak job protections and meagre support during unemployment,0
176,for example when a broader measurement of unemployment is used unemployment 6 currently just below 18 as opposed to the narrower definition unemployment 3 standing at 91 the slope of the euro area phillips curve appears to have become steeper in recent years,0
177,youth unemployment has declined from its peak above 24 in 2013 to just above 19 recently but still remains above its precrisis level and especially high in some member countries,0
178,the unemployment rate also continues to decline despite an increase in labour force participation and is now at its lowest level in eight years,0
179,we can look back on 17 quarters of economic growth and an unemployment rate that has fallen from around 12 to around 9,0
180,and indeed it seems that the headline unemployment rate doesnt reflect some of the slack in the labour market,0
181,using broader measures of unemployment reveals that the labour market is less tight than the general unemployment rate suggests,0
182,the unemployment rate has fallen to its lowest level in eight years,0
183,youth unemployment in the euro area youth unemployment is not a recent phenomenon,0
184,in europe the worsening labour market performance for young people became apparent in the 1970s when unemployment increased from 46 to 111 by the end of the decade partly due to the substantial increase in supply as the socalled babyboomers entered the labour market,0
185,1 in 2007 when total unemployment in the euro area declined to 75 its lowest level since the early 1980s the unemployment rate for young people was already very high at around 15,0
186,during the great recession and the corresponding cyclical downturn youth unemployment surged markedly,0
187,between 2007 and 2013 it increased by about 9 percentage points in the euro area  twice as much as the overall unemployment rate,0
188,greece and spain entered the crisis with youth unemployment rates of 23 and 18 respectively and reached rates well above 50 by 2013,0
189,in comparison the youth unemployment rate in germany a country less affected by the cyclical downturn declined from about 12 in 2007 to about 8 in 2013,0
190,as a result from its peak in 2013 the youth unemployment rate fell from 24 to around 19 in 2016 but is still about 4 percentage points higher than at the beginning of the crisis in 2007,0
191,however headline unemployment rates give only a partial picture of the labour market situation,0
192,many young people in the euro area are still in education or are not actively seeking employment,0
193,the possible significant social and economic consequences are even more relevant if we look at new measures of labour utilisation taking into account both unemployed people and those not involved in further education or training,0
194,the persistence and heterogeneity of youth unemployment across member states point to continued underlying problems in labour market structures with correspondingly high costs for our societies,0
195,longterm costs of youth unemployment cyclical unemployment can turn structural if people remain unemployed for a long time,0
196,the sense of detachment that is produced by prolonged unemployment has been well documented in several social experiments,0
197,the role of policies  as we have seen there are cyclical and structural reasons for the high rates of youth unemployment,0
198,10  but the rise in youth unemployment has also deeply rooted structural reasons,0
199,the persistence and heterogeneity of youth unemployment rates across the euro area countries even before the crisis as well as the diverse developments during the crisis indicate that there is need for specific policies to improve education and labour market functioning in some countries,0
200,higher levels of education are positively correlated with both greater labour market participation and lower unemployment,0
201,the risk of losing a job is significantly higher for people with low educational attainment,0
202,and this group was severely hit by the crisis with their unemployment rate increasing from about 11 in 2008 to 21 in 2013 in the euro area,0
203,for example in ireland the unemployment rate of young people with an educational attainment below lower secondary education was 275 in 2016 while for young people with tertiary education it was about 11,0
204,the vocational education system together with more flexible wage setting and stronger public support for helping the unemployed to seek and find jobs as well as lower labour market segmentation explain in part why the youth unemployment rate is lower in germany than in france,0
205,in some countries and ireland is one of them some progress in reducing youth unemployment has been achieved,0
206,4 for example gregg p and e tominey 2005 show that an early period of unemployment can lower wages by up to 20 at the age of 42 see gregg p and e tominey 2005 the wage scar from male youth unemployment,0
207,unemployment has fallen to precrisis levels in many countries,0
208,and there is another issue the headline unemployment rate seems to miss some of the slack in the labour market,0
209,the unemployment rate is also continuing to fall despite an increase in labour force participation and is now at its lowest level in eight years,0
210,the socalled u6 measure captures unemployment underemployment meaning workers who would like to work more hours and marginal attachment namely those workers who are not competing very actively in the labour market for example because they are not available to start a new job at short notice,0
211,labour market slack measured in this way currently affects around 18 of the euro area extended labour force and is thus considerably higher than the headline unemployment rate,0
212,euro area unemployment rate has receded despite still too high unemployment rates in some countries see slide 3 chart on the right,0
213,for example it is possible to analyse to what extent not only the gini coefficients but also income and wealth of individual households react to changes in the unemployment rate or to increased growth of wages and asset prices,0
214,as for the variables which affect household income in the bottom two panels the unemployment rate declines by roughly 07 percentage points while wages rise somewhat,0
215,the impulse responses give information about the aggregate response of the intensive wages and the extensive unemployment margin,0
216,to distribute the decline in the unemployment rate across households depending on their demographics such as age education marital status and the number of children a probit model is estimated at the country level with the employment status as the dependent variable,0
217,22 such a model captures some heterogeneity in the probability of employment across households,0
218,the fitted values from the probit model are then used to run a simulation that distributes the aggregate decline in unemployment across households,0
219,23 chart 8 compares the changes in the unemployment rates across income quintiles,0
220,note the numbers in brackets show initial unemployment levels in percent,0
221,the aggregate decline in unemployment following the app disproportionately impacts groups with a higher share of the unemployed such as those in the lowest income quintile,0
222,24 the effect is economically important as in that quintile unemployment rates drop by more than 2 percentage points,0
223,for the remaining income quintiles the drop in the unemployment rates does not exceed 05 percentage points,0
224,these changes in the employment status affect the distribution of income and overall tend to compress income inequality,0
225,the positive overall effect of unemployment reductions and wage increases on the income distribution is shown on chart 9,0
226,the simulation is undertaken in such a way that the aggregate number of newly employed people is equal to that implied by the aggregate decline in unemployment estimated using the var for each country,0
227,24 the probit model also implies a second dampening effect whereby the probability of employment for the households in the lowest income quintile is lower than for others,0
228,however this effect is relatively small compared to how disproportionately the unemployed are represented in the lowest quintile,0
229,first the newly employed households receive a wage determined by estimates from a heckman selection model,0
230,2 unemployment is at its lowest level in eight years,0
231,as the unemployment rate continues to decline despite a rise in labour force participation households real disposable income is improving,0
232,the socalled u6 measure captures unemployment underemployment meaning workers who would like to work more hours and marginal attachment namely those workers that are not competing very actively in the labour market eg,0
233,this measure currently covers 18 of the labour force in the euro area and is thus considerably higher than the unemployment rate,0
234,they ensure that crises do not lead to persistently high unemployment,0
235,the unemployment gap  the difference between actual unemployment and the nonaccelerating inflation rate of unemployment nairu  is narrowing and is forecast by the commission to close within the next two years,0
236,another reason why there is some uncertainty over slack is the correct notion of unemployment  that is there may be residual slack in the labour market that is not being fully captured in the headline unemployment measures,0
237,unemployment in the euro area has risen during the crisis but so too has the number of workers who are underemployed meaning that they would like to work more hours or who have temporary jobs and want permanent ones,0
238,if one uses a broader measure of labour market slack including the unemployed underemployed and those marginally attached to the labour force  the socalled u6  that measure currently covers 18 of the euro area labour force,0
239,as shown in the united states the gap between the headline unemployment rate and those broader measures typically opens in recessions and shrinks in expansions,0
240,unemployment has fallen to its lowest level since 2009,0
241,the first point to consider is whether the crisis has had a significant effect on labour participation  that is the size of the total labour force,0
242,but even though labour force participation has held up relatively well in the euro area the second issue we need to look at is the composition of the unemployed,0
243,it might be the case that given the depth and severity of the crisis some workers have remained in the labour force but have been without a job for so long that they have become virtually unemployable  that is that they have become structurally unemployed,0
244,what we see here is that in certain countries where unemployment rose sharply and where there was a strong sectoral dimension to the crisis estimates of structural unemployment have indeed risen significantly,0
245,at face value this would suggest that virtually all of the unemployment that we currently observe in spain is of a structural nature  and that the crisis has left permanent and irreversible scars,0
246,5  today commission staff believe that structural unemployment in the euro area is closer to 9  compared with an actual unemployment rate of 95 in march 2017,0
247,in other words without the significant downward revisions of recent years we would currently face a negative unemployment gap in the euro area,0
248,if structural unemployment had indeed risen during the crisis to the extent suggested then we would have expected inflationary pressures to emerge much more rapidly since the unemployment gap would have been closing faster than otherwise,0
249,despite a rapid fall in the unemployment rate wages have remained stubbornly low,0
250,these analyses therefore do offer one useful conclusion that slack may be larger and that structural unemployment may perhaps not have risen by as much as some estimates suggest,0
251,currently there are more than seven million underemployed parttime workers across the euro area  those who would like to work more hours but cannot  an increase of around one million since the crisis,0
252,recent estimates by ecb staff  which you can see on the righthand side of slide 4  suggest that broader measures of labour market slack including the unemployed underemployed and those marginally attached to the labour force currently affect around 18 of the extended euro area labour force,0
253,still while the labour market has proven surprisingly resilient to the repercussions of the doubledip recession the perils of hysteresis  of real scars  remain you can see on slide 6 that longterm unemployment as a share of total unemployment has increased from levels around 45 before the outbreak of the crisis to 50 today and has barely declined in recent years,0
254,in other words one in every two of the more than 15 million currently unemployed face the risk of becoming increasingly detached from the labour market,0
255,some of the longterm unemployed will be absorbed back into the labour force as the recovery continues and some of the marginally attached will also rejoin,0
256,this is particularly worrisome for younger generations for whom extended spells of unemployment at the start of their working lives may lead to lifelong scarring effects  including a higher propensity for further spells of unemployment which are likely to constrain labour market choices and earnings throughout their working lives,0
257,this is consistent with a lower degree of matching efficiency postcrisis with the unemployment level still remaining high despite rising labour demand over the duration of the recovery,0
258,at the same time we need to monitor carefully developments in longterm unemployment labour force participation rates and hours worked with a view to informing our assessment on the likely evolution of structural unemployment,0
259,should the share of longterm unemployed stabilise at one point with no convincing signs of further likely downward adjustments the risks of inflationary pressures starting to emerge at higher levels of unemployment would increase,0
260,the answer therefore has to address the structural causes of low trend growth and longterm unemployment through policies supporting productivity and minimising both dualities in the labour market and social exclusion,0
261,4 participation rates have fallen for the under25s and remain some way below their precrisis levels  in part reflecting higher enrolment rates as young people exercise their outside option of staying in education in the face of less advantageous labour markets,0
262,five million more people are employed now than were in 2013 and unemployment though still too high is at an eightyear low,0
263,and unemployment in the euro area is at its lowest point since may 2009,0
264,the euro area unemployment rate stands at its lowest level since april 2009,0
265,unemployment is at its lowest point since may 2009,0
266,and unemployment has declined to 95 in february 2017 the lowest level since may 2009,0
267,this is evidenced by 15 consecutive quarters of positive real gdp growth unemployment at its lowest level since 2009 and over four and a half million more people employed now than was the case three years ago,0
268,decomposing the forces that have weighed on wage growth3 we find two principal drivers first the stillhigh unemployment rate and its effect on wage bargaining dynamics and second a belowaverage contribution from past inflation in wage formation caused by the last few years of exceptionally low headline inflation,0
269,the unemployment rate is back down to singledigit figures and over four million more europeans are employed now than three years ago,0
270,economic sentiment is at its highest level in nearly six years and unemployment is at its lowest level in nearly eight years,0
271,the unemployment rate has reached its lowest level since 2009,0
272,economic sentiment is at its highest level in nearly six years and unemployment is back to singledigit figures,0
273,in the euro area the seasonally adjusted unemployment rate fell to 96 in december,0
274,unemployment has fallen to 96 its lowest level since may 2009,0
275,compared to 2013 there are 35 million fewer unemployed in the euro area a decrease by more than 18,0
276,the unemployment rate fell to 96 in december its lowest rate since may 2009,0
277,the unemployment rate is back to a singledigit figure,0
278,its unemployment has fallen from close to 11 in 2005 to under 4 today and that was during the worst recession since the 1930s,0
279,yet it has seen its unemployment fall from more than 15 in 2012 to 7 today not least because of its flexible labour market and successful industrial strategy aimed at attracting fdi,0
280,unemployment is at a sevenyear low,0
281,but in other euro area countries unemployment remains very high especially among young people,0
282,there are many reasons for this ranging from rising unemployment a larger number of single parents reduced spending on education through to steady deindustrialisation,0
283,reducing the structural unemployment rate and increasing participation rates to the average levels of the top three economies in the euro area is in many cases sufficient to offset the demographic drag even assuming output per worker remains the same,0
284,the current high rates of youth unemployment are likely compromising the future productivity of this generation  and its precisely this group which will have to support a larger number of dependants than previous generations did,0
285,the unemployment rate peaked at 265 in 2013 but is now at 19,0
286,the high rates of structural unemployment duality in the labour market and people being discouraged from entering the labour market have also a human as well as an economic cost,0
287,reducing unemployment is socially positive from a distributional point of view,0
288,the distributional impacts of lower unemployment and higher participation are positive,0
289,all these efforts need to go hand in hand with policies to alleviate the costs for the most vulnerable members of society and to help the economy escape the trap of high and longterm unemployment and increased inequality,0
290,in fact euro area unemployment has been steadily declining,0
291,with high levels of youth unemployment in several member states2 large numbers of young people feel economically and socially marginalised,0
292,2in september 2016 youth unemployment stood at 371 in italy and 426 in spain,0
293,youth unemployment stood at 427 in greece in july 2016,0
294,employment has grown by more than four million since its trough in 2013,0
295,the current recovery however has reduced the unemployment rate from more than 12 in 2013 to 10 today,0
296,and besides lower unemployment the overall labour force has expanded as well in recent years reflecting increasing labour participation rates,0
297,2  a faster return to full employment  or what economists call the nonaccelerating inflation rate of unemployment  is clearly supportive of price stability since it heralds a tighter labour market and stronger wage pressures,0
298,unemployment is falling reaching 10 in the third quarter,0
299,youth unemployment fell to 206 in the third quarter and continues to decline more rapidly than the overall unemployment rate,0
300,the distressingly high rates of youth unemployment witnessed in many euro area economies are likely to cause some labour market scarring,0
301,economic activity would have been lower and unemployment  particularly youth unemployment  higher,0
302,on the other hand the unemployment rate albeit falling still remains above 10 amid a continuous increase in the participation rate in the labour force since the crisis,0
303,this means that people made unemployed due to the cyclical downturn may remain out of employment for too long losing valuable human capital and finally becoming structurally unemployed a tragedy for them and their families and a loss for society,0
304,2 the high rates of youth unemployment are also likely to result in labour market scarring,0
305,the euro area unemployment rate fell from 112 at the start of 2015 to 101 now,0
306,1 and a faster return to full employment should in turn contribute to lower future inequality since we know that if unemployment lasts too long it can lead to permanent income losses through labour market scarring,0
307,and as the economy has strengthened we have indeed seen the unemployment rate falling significantly,0
308,unemployment in both jurisdictions which had spiked in the early phase of the crisis levelled off and began to decrease,0
309,and once the unemployment rate starts falling it rarely returns to the previous low,0
310,the result is that euro area unemployment has risen steadily for 40 years,0
311,unemployment although still unacceptably high in some countries declined in 2016 for the third consecutive year and employment growth in the euro area has beaten our expectations,0
312,economically the pace of recovery in the euro area remains unsatisfactory with unemployment levels still too high,0
313,not only is the share of young people declining in the euro area but unfortunately despite being the besteducated generation ever they have more trouble in entering the labour market,0
314,youth unemployment exceeds overall unemployment in all countries and for the whole area the difference is a staggering 12 percentage points,0
315,the nominal and real labour market rigidities that we have traditionally lived with in europe have resulted in what is being called the european unemployment disease persistently high unemployment rates and a limited ability to adjust to economic shocks,0
316,the end result is that euro area unemployment has risen steadily for 40 years,0
317,france is still lagging behind and although a labour market reform is now being discussed whether it is sufficiently ambitious to significantly lower the equilibrium unemployment rate remains to be seen,0
318,8 in the euro area structural unemployment is estimated to have risen during the crisis and youth unemployment remains high,0
319,reducing trend unemployment is in part about reversing the hysteresis effects i described above,0
320,this is a consequence of structural features of euro area labour markets which have been ratcheting up unemployment over successive cycles,0
321,in that context employment growth is likely to start decelerating in the nottoodistant future even with determined structural reforms as a higher share of people in work will no longer be able to offset the fall in working age population,0
322,that in turn helps keep unemployment lower than would otherwise be the case and prevents the consequences of the downturn from lasting longer than they need to  for instance by eroding the human capital of the jobless leading to permanently higher structural unemployment,0
323,and yet in some euro area countries unemployment remains very high especially among young people,0
324,one key issue in this respect is youth unemployment as it prevents young people from playing a full and meaningful part in society,0
325,the outcome was a phase of socalled stagflation where both inflation and unemployment rose in tandem,0
326,the higher jobless rate which results from this labour shedding process exacerbates the downward pressure on the general price level and sets the conditions for this process to become selffeeding,0
327,employment is rising up by over 2 million people compared with the trough in 2013,0
328,very low inflation complicates the adjustment process within countries leading to higher unemployment,0
329,and though the euro area unemployment rate is declining  down almost 15 percentage points from its 2013 peak  a great deal of slack still remains in the labour market,0
330,indeed if unemployment continues to decline at its current pace it may take years before the euro area returns to its precrisis unemployment rates,0
331,rigid wage structures higher unemployment and lower economic growth are the result,0
332,unemployment increased steadily in subsequent years reaching about 12 percent of the labour force in 2013 and has since come down only slowly by one percentage point to 11 percent,0
333,if we were to add the number of parttime workers preferring to hold a fulltime job and of those discouraged to look for a job figures also published by eurostat the real situation would be undoubtedly grimmer,0
334,in spite of recent increases total employment is still 33 million people below the precrisis period,0
335,the price paid has been the unacceptable number of unemployed of whom many too many are young people,0
336,moreover even unconstrained households may increase precautionary savings in the face of uninsurable income risk further tempering the effects of a reduction in longterm rates,0
337,that can lead to higher unemployment,0
338,employment increased further in the second quarter of 2015 while the unemployment rate has continued to decline,0
339,longterm unemployment has risen with hysteresis effects estimated to have reduced potential growth,0
340,youth and longterm unemployment has risen significantly in the euro area with hysteresis effects estimated to have notably reduced labour supply,0
341,if such pessimism were to persist we would risk that low investment and high unemployment enter a feedback loop increasing the likelihood of the economy settling into a form of underemployment equilibrium,0
342,10 unemployment hits the young hardest creating a lost generation,0
343,the risks of longterm unemployment are reduced in this way and an economy recovery takes place more quickly,0
344,the pressure to restore growth and reduce unemployment has been understandably very strong in our societies,0
345,by reducing the cyclical component of unemployment it also contributes to reducing a major source of inequality particularly amongst the young and lowerincome groups,0
346,the risk also increases that differences in structural unemployment become entrenched across the union,0
347,unemployment rates in all three countries have nonetheless been on a downward trend since 2009,0
348,yet with high structural unemployment there is clear scope to increase quantities especially through labour market policies targeted at reactivating the longterm unemployed,0
349,this would mean that a significant share of the economic losses in the crisis would become permanent with structural unemployment staying above 10 and youth unemployment elevated,0
350,youth unemployment would also remain elevated with devastating effects for individuals in terms of labour market scarring,0
351,high levels of structural unemployment compounded by high numbers of underemployed and discouraged workers imply a latent potential in our economies for a major positive shock to labour supply chart 5,0
352,this situation is largely structural in nature 1 structural unemployment is now over 10,0
353,as result structural unemployment unemployment caused by a mismatch between jobs and skills has risen in the euro area as whole increasing from just under 9 in 2008 to almost 10 in 2014 3 and much more in some stressed countries,0
354,for example in some countries active labour market policies aimed at retraining vulnerable groups such as the low skilled the longterm unemployed and the inactive can play a key role in getting people back to work  which is particularly important given the drag that ageing societies will create on labour supply,0
355,employment continued to grow in the fourth quarter of 2014 and the level of unemployment is continuing to fall gradually from elevated levels,0
356,and in fact this relationship measurably increases if one adjusts the headline rate of unemployment for those who have become detached from the labour market for a long time and who are likely to exert only a mild amount of downward pressure on wage and price formation,0
357,the available short term unemployment series was shorter than the full sample so the unemployment gap was used in this framework to proxy the labour market slack,0
358,the unemployment gap is inverted,0
359,matias yes as we still have a few seconds yes mr draghi unemployment is being reduced in the same amount of the velocity of the people who have to leave the country which has been more than 300000 people,0
360,and in january the euro area unemployment rate dropped to the lowest level observed since august 2012,0
361,but it also reflected the faster adjustment in prices and wages in the irish economy which helped unemployment to begin stabilising in late 2010 while in spain it rose until early 2013,0
362,and if they also have lower growth potential then that unemployment is more likely to become entrenched and structural,0
363,unemployment is only falling very slowly,0
364,we also know that with high unemployment in many euro area countries workers have less power to negotiate higher wages which reduces inflation pressures,0
365,cyclical factors have thus played an important role in increasing unemployment,0
366,at the same time there is ample evidence that a significant proportion of the current unemployment is structural,0
367,unemployment is still at 115,0
368,since only half of us households hold equities and they tend to be the wealthiest households this policy could be making the wealth distribution more unequal,0
369,the result was that these countries experienced a quantity adjustment  higher unemployment  which triggered a protracted disinflationary process that is still ongoing,0
370,i am aware that unemployment may not be the most obvious challenge to talk to you about on such a celebratory occasion,0
371,high unemployment in the euro area  merely a temporary phenomenon,0
372,temporary rises in unemployment rates are typical of cyclical downswings,0
373,however during the second recessionary dip unemployment increased although aggregate vacancy rates remained close to longterm averages,0
374,the proportion of people in longterm unemployment rose substantially,0
375,long spells of unemployment may thus easily turn into structural unemployment,0
376,it is essential therefore to avoid hysteresis effects from rises in spells of longterm unemployment,0
377,unemployment in the euro area remains at unacceptably high levels,0
378,for the unemployed themselves it is often a tragedy which has lasting effects on their lifetime income,0
379,for those in work it raises job insecurity and undermines social cohesion,0
380,figure 1 change in the unemployment rate since 2008  the euro area and the us      the long recession in the euro area the first point to make is that the euro area has suffered a large and particularly sustained negative shock to gdp with serious consequences for employment,0
381,whereas the us experienced a sharp and immediate rise in unemployment in the aftermath of the great recession the euro area has endured two rises in unemployment associated with two sequential recessions,0
382,from the start of 2008 to early 2011 the picture in both regions is similar unemployment rates increase steeply level off and then begin to gradually fall,0
383,unemployment in the us continues to fall at more or less the same rate,0
384,that being said there are signs that in some countries at least a significant share of unemployment is also structural,0
385,for example the euro area beveridge curve  which summarises unemployment developments at a given level of labour demand or vacancies  suggests the emergence of a structural mismatch across euro area labour markets figure 3,0
386,the second recessionary episode however led to a further strong increase in the unemployment rate even though aggregate vacancy rates showed marked signs of improvement,0
387,figure 3 evolution of the euro area beveridge curve over the crisis     part of the explanation for the movement of the beveridge curve seems to be the sheer magnitude of the job destruction in some countries which has led to reduced jobfinding rates extended durations of unemployment spells and a higher share of longterm unemployment,0
388,3 by the end of 2013 the stock of longterm unemployed those unemployed for a year or more accounted for over 6 of the total euro area labour force  more than double the precrisis level,0
389,for example research by the european commission suggests that estimates of the nonaccelerating wage rate of unemployment nawru in the current situation are likely to overstate the magnitude of unemployment linked to structural factors notably in the countries most severely hit by the crisis,0
390,the current unemployment rate in the euro area of 115 is the weighted average of unemployment rates close to 5 in germany and 25 in spain,0
391,7 but it also reflects the relationship between labour market institutions and the impact of shocks on employment,0
392,from 2011 to 2013 structural unemployment is estimated to have risen by around 05 percentages points in ireland whereas it increased by more than 25 percentages points in spain,0
393,for example the oecd estimates that the 2012 labour market reform in spain has improved transitions out of unemployment and into employment at all unemployment durations,0
394,demand side policies are not only justified by the significant cyclical component in unemployment,0
395,reducing structural unemployment and raising labour participation is a key part of that,0
396,as i said structural unemployment was already estimated to be very high coming into the crisis around 9,0
397,the first is policies that allow workers to redeploy quickly to new job opportunities and hence lower unemployment duration,0
398,the longerterm effects of high youth unemployment also point to this conclusion,0
399,the number of unemployed aged between 15 and 24 relative to the labour force of the same age group increased from an already high level of around 15 in 2007 to 24 in 2013,0
400,     1it is important to note however that the difference in euro area unemployment developments relative to the us also reflects very different developments in labour market participation,0
401,over the period 201012 the decline in the participation rate contributed significantly to the fall in the unemployment rate in the us,0
402,at the same time the rising participation rate in the euro area explains part of the rise in the unemployment rate,0
403,assuming that in both the us and the euro area the labour force participation ratios had remained unchanged compared with 2007 and that the difference to the actual ratios had been fully reflected in the number of unemployed the us unemployment rate in 2012 would have been higher than that of the euro area,0
404,although labour markets have shown some signs of improvement unemployment remains high in the euro area,0
405,2  second euro area unemployment is still high and the youth are suffering disproportionately,0
406,after growth has resumed unemployment and inequalities have receded and economies have sufficiently converged,0
407,3euro area unemployment rose to 120 in 2013,0
408,youth unemployment reached 240 in the euro area and increased dramatically in greece and spain to 583 and 555 respectively,0
409,the recovery path remains fragile and unemployment is too high particularly in europe,0
410,unemployment is way too high in many countries,0
411,these signs are encouraging even though growth remains below rates observed before the global recession and unemployment rates in particular for young people remain unduly high,0
412,22 the crisis itself had a more pernicious and longlasting effect on the euro area labour market through the increase in structural unemployment and skills mismatch with the unemployment rates of those staying out of work for longer and those with lower skills increasing more in relation to the average unemployment rate,0
413,these benefits are greater when overall unemployment is high as is the case in a number of euro area countries right now,0
414,some have unemployment rates under 5 while in others unemployment exceeds 25,0
415,at the end of 2012 18 of workers in the euro area with low education levels were unemployed compared with only 6 of highly educated workers,0
416,indeed educational attainment is no longer only a factor in income but also in employment prospects at the end of 2012 18 of workers with low education levels were unemployed compared with only 6 of highly educated workers,0
417,unemployment remains unacceptably high,0
418,this is important as having an adequate social safety net and job search and retraining programmes can reduce unemployment duration and so lower the longterm costs of an adjustment phase,0
419,nevertheless unemployment remains unacceptably high and the recovery is fragile,0
420,nevertheless the recovery remains relatively weak and uneven and there is a long way to go to bring down the very high levels of unemployment,0
421,however this has to be set against an increase in euro area longterm unemployment from 3 to 6 which creates a risk of workers skills being eroded and skill mismatches emerging,0
422,the unemployment rate started declining in 2012 falling from 14 in december that year to 12 a year later,0
423,they include reducing the still high rates of unemployment for the longterm unemployed and the young,0
424,at the same time the unemployment rate rose to very high levels in all these countries with the rate of youth unemployment being more than double the overall one,0
425,as a result in ireland an exportdriven recovery started back in 2011 while the unemployment rate started to decline in 2012,0
426,with the return to positive growth rates last year the upward trend in the unemployment rate came to an end in most euro area countries,0
427,let me stress that this is not enough and unemployment rates particularly among young people remain unacceptably high in many crisis countries,0
428,however the labour market reforms undertaken give us confidence that unemployment will start falling faster once the recovery picks up,0
429,the level of unemployment especially that of young people is depressingly high in many countries,0
430,unemployment is expected to remain high and persistent,0
431,reducing unemployment the current crisis with its associated fall in incomes and rise in unemployment has however bred misunderstanding and sometimes anger in many parts of europe,0
432,unemployment in the euro area stood at 122 in september 2013 compared with 76 at the beginning of the financial crisis in the second quarter of 2007,0
433,in greece and spain the youth unemployment rate is over 50,0
434,interestingly these average unemployment rates were essentially the same before the financial crisis,0
435,unemployment has settled at unacceptably high levels,0
436,but a fraction will trail as it will take time for the longerterm unemployed to adapt to the postcrisis dislocations in the labour market,0
437,unemployment has soared throughout the region at times to unacceptably high levels of close to 30 per cent in bosnia and herzegovina and 17 per cent in croatia,0
438,far too many people are currently without work with unemployment at over 27 and youth unemployment reaching 57,0
439,to name just one unemployment has remained at rather high levels hovering at around 8,0
440,the unemployment rate currently at around 12 remains unacceptably high,0
441,at the same time the recession has been deep and has left unprecedented and unacceptably high unemployment,0
442,the unemployment rate currently standing at 121 remains unacceptably high and the risks around the outlook continue to be tilted to the downside,0
443,and unemployment is still far too high,0
444,questions of excess inequalities and high unemployment will have to be addressed,0
445,the latest euro area seasonally adjusted unemployment rate was 122 in may 2013,0
446,2 for example long spells of unemployment could result in the destruction of human capital and in the absence of active labour market policies a permanent deterioration in the chances of finding a new job,0
447,unemployment hysteresis which refers to the possibility that any increases in unemployment become permanent might also be observed in the presence of segmented labour markets where wages are set between workers and firms and unemployed workers are not represented,0
448,youth unemployment is a case in point,0
449,before the crisis the youth unemployment rate was twice the average rate of overall unemployment it is now 26 times higher,0
450,there are currently more than 19 million people unemployed in the euro area,0
451,almost a quarter of young people are out of work,0
452,such high levels of joblessness are a tragedy,0
453,let us not forget that those who suffer the most from unreformed labour markets are often young people as evidenced by the very high levels of youth employment today,0
454,unemployment especially youth unemployment has significantly increased since 2008,0
455,unacceptably high levels of unemployment particularly youth unemployment are the prime concern of economic policymakers,0
456,confirming this bleak picture the unemployment rate has stayed in double digit territory,0
457,just think of the case where for example an increase in unemployment and a decline in the labour force participation are felt excessively by lowskilled workers 6,0
458,in addition young people are those most affected by unemployment,0
459,to take two examples youth unemployment in spain was at 55 and in greece at 57 at the end of 2012,0
460,not only is unemployment an immediate social loss but it is a stressful life event that reduces individual wellbeing in many persistent ways,0
461,the crosscountry dispersion of unemployment has also widened with latest unemployment rates ranging from 48 in austria to 27 in greece,0
462,in some euro area countries this phenomenon is driving youth unemployment to levels that threaten the very fabric of society,0
463,the employment rate in the euro area as a whole is still more than two percentage points below its peak according to oecd figures,0
464,youth unemployment rates in a number of stressed countries also remain unacceptably high,0
465,there is no doubt that lasting growth is essential for reducing unemployment particularly among young people,0
466,in some european countries youth unemployment has reached levels that damage peoples faith in prospects for a decent life and which risk giving rise to extreme and destructive forms of protest,0
467,after an initial fall in gdp of almost 18 in 2009 gdp increased by more than 11 from 2010 to 2012 and unemployment has fallen by almost 7 percentage points from its peak,0
468,more generally growth remains weak and unemployment especially for young people is unacceptably high,0
469,we are deeply concerned by the levels of unemployment we are seeing in particular for young people,0
470,unemployment increased to unprecedented levels,0
471,unemployment has reached unprecedented levels especially among young people,0
472,almost 19 million people in the euro area are currently without jobs  this includes almost one in every four young people,0
473,let me be clear i am also very concerned by the high level of unemployment,0
474,as a result almost 6 out of 10 are currently unemployed,0
475,lowskilled and young workers were the hardest hit with a youth unemployment rate of more than 24 in january 2013 in the euro area as a whole and as high as 555 in spain and 387 in italy,0
476,a higher level of unemployment is associated with a given level of vacancies,0
477,people worry that a stagnating economy will lead to the emergence of a lost generation where young people have no jobs and even worse no hope,0
478,almost 19 million people are unemployed  more than the population of the netherlands,0
479,in one country in the euro area more than fifty percent of young people cannot currently find jobs,0
480,however since 2010 in all three countries unemployment has fallen relatively quickly,0
481,high uncertainty related to falling disposable income and increased unemployment has pushed up the precautionary savings of households,0
482,we expect however that progress in structural reforms especially those that improve the functioning of labour markets will help lower unemployment and facilitate new employment opportunities,0
483,it would be particularly welcome if this improved in particular the functioning of labour market for young people so that they can find a job,0
484,taking into account fluctuations in wages and unemployment a typical finding in several countries is that inequality in earnings at the bottom of the distribution tends to rise during recessions,0
485,taken together these factors suggest that unemployment remains a crucial determinant of inequality and poverty,0
486,there is a need for a comprehensive strategy to support job creation and ensure that the unemployed are employable,0
487,price stability appears to be conducive to economic growth low unemployment and subdued income volatility,0
488,nevertheless tackling this strong increase in youth unemployment should be a priority,0
489,delays in this area are particularly costly and have manifested themselves in high unemployment rates particularly among young people,0
490,the cumulative output decline was 24 unemployment peaked at 20,0
491,in the european union between 2007 and 2011 the unemployment rate rose by 58 percentage points among the 1524 year olds by 35 points among the 2534 year olds and by 18 points in the 3564 age range,0
492,qualitatively the profile is similar almost everywhere the clear exception is germany where the unemployment rate among 15 to 24 year olds in the first quarter of 2012 was 8 in italy it was 342 in spain 507 and the euro area average was 219,0
493,the weakness of the social shock absorbers is that relatively high job protection for those in employment is accompanied by weaker protection for those out of work contrary to what happens in the nordic models where the socalled flexisecurity combines an extensive social safety net with less job protection,0
494,youth unemployment in the euro area was 22 in march 2012,0
495,unemployment is now at the lowest level since january 2009,0
496,this is what lies behind the very high rate of youth unemployment,0
497,unemployment has strongly increased,0
498,how can we reverse the dramatic increase in unemployment,0
499,this would include structural reforms that address weaknesses in the labour market and in particular reduce longterm unemployment,0
500,unemployment rates have reached unacceptably high doubledigit rates in some countries and segments of the population ie,0
501,first the unemployment rate depends not only on the economic growth rate but also on the characteristics of the labour market,0
502,in a situation of high unemployment this risk is limited but gradually as the economic recovery gets under way the risk of secondround effects increases,0
503,while emphasis on output gap measures can instil the conviction that unemployment could be reduced by monetary means it becomes an illusion if the problem is due to a structural mismatch of skills or labour market imperfections,0
504,by 2020 the eu should increase its employment rate among 20 to 64 year olds to 75 from about 69 in 2009,0
505,moreover the unemployment rate has stabilised in the last few months and stood at 100 in the third quarter of 2010,0
506,the size of the working age population relative to the overall population and the employment rate chart 1,0
507,given that such a shift in resources cannot occur instantaneously it should not be surprising if the us economy experienced a period of temporary higher unemployment,0
508,the tightening of credit availability and the increase in unemployment risk also dampened household spending,0
509,for instance adjusting the unemployment benefit replacement ratio by 5 percentage points has been estimated to give rise to an increase of 15 in output and 17 in employment over a period of five years,0
510,since early 2008 the number of unemployed people in the euro area has risen by over 4½ million,0
511,in the euro area real gdp fell by altogether almost 45 percent and unemployment rose by 14 percentage points in just six months,0
512,2 also labour market reforms such as for instance an adjustment of the unemployment benefit replacement ratio by 5 percentage points has been estimated to give rise to 15 more output and 17 more employment over a period of 5 years,0
513,that said considerable increases in the rate of unemployment in most countries are expected between the fourth quarter of 2009 and the fourth quarter of 2010,0
514,this phenomenon used to characterise europe whereas the us labour market significantly more flexible and dynamic was essentially immune to it with a comparatively low fraction of longterm unemployed,0
515,it is a measure of the depth of the recession in the united states that in october of last year nearly 40 of the unemployed had been out of a job for at least six months whereas 20 had been jobless for at least a year,0
516,unemployment which reached 97 in the euro area in september is expected to continue rising for some time in many countries weighing on consumer spending,0
517,unemployment has drifted up,0
518,unemployment is a clear concern right now in many parts of the euro area and we surely do not want to lose human capital or scar a large proportion of the people of working age,0
519,unemployment has been lower on average and employment growth stronger,0
520,in particular whereas the employment rate for primeage males in the euro area is comparable to that in the united states significant disparities between the two areas remain concerning the youth female and older segments of the labour force,0
521,finally the youth employment rates in the two areas were 38 and 542 respectively,0
522,s kuroda and i yamamoto the impact of downward nominal wage rigidity on the unemployment rate quantitative evidence for japan imes discussion paper no 2003e12 2003,0
523,most households today simply do not have the time skill or the access to the relevant information in order to manage themselves their longterm savings,0
524,peoples attitude toward inequality may well be influenced by their expectations of social mobility,0
525,6 second the unemployment rate is still too high on average in the euro area and especially in certain countries,0
526,4 it suggests that when individuals see an increase in their income their level of satisfaction does not necessarily rise if the increase is very unequal,0
527,5 one possible explanation is that the mechanisms of upward mobility in american society which in the past made inequality more acceptable have ground to a halt in recent years,0
528,secondly the functioning of slovakias labour market must be further improved and the high structural unemployment reduced,0
529,while the reform of the educational system might help to reduce unemployment in the medium term making labour legislation more flexible as well as eliminating existing wage rigidities would help to alleviate pressures in the labour market more rapidly,0
530,from the start of emu to the end of last year as i have already mentioned the number of people in employment in the euro area has increased by 157 million compared with an increase of only some 5 million in the previous nine years and the euro area unemployment rate has fallen to its lowest level since the early 1980s,0
531,the overall employment rate in the euro area remains modest by international standards  657 in the euro area compared with 72 in the united states  and the unemployment rate is still clearly too high  over 7 in the euro area,0
532,more specifically while the employment rate of primeage men in the euro area is comparable with that in the united states considerable disparities remain when we look at employment rates among the young among women and among older workers,0
533,moreover employment rates and labour force participation have increased significantly in recent years and unemployment rates have fallen to levels not seen for 25 years,0
534,first there is a need to further increase the labour market participation and employment rate of all groups of society,0
535,employment growth has been much faster in the last ten years and unemployment has reached a 25year low,0
536,since the start of emu to the end of last year the number of employed people has increased by 157 million in the euro area compared with an increase of approximately only 5 million in the nine preceding years and the euro area unemployment rate has fallen to its lowest level since the early 1980s,0
537,the overall employment rate in the euro area remains modest by international standards 657 in the euro area compared with 72 in the united states and the unemployment rate is still clearly too high,0
538,unemployment has started to rise again  the first sign of an economic slowdown the unemployment rate in spain is at around 9 compared with 8 in the middle of last year,0
539,in italy where there is no automatic indexing the unemployment rate is below 6 the lowest level since the early 1980s,0
540,6 since the start of emu the number of employed people has increased by more than 15 million in the euro area compared with an increase of approximately 5 million in the nine preceding years and the euro area unemployment rate has fallen to its lowest level since the early 1980s,0
541,at the same time the euro area unemployment rate has fallen to its lowest level since the early 1980s,0
542,in addition employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years,0
543,at the same time labour markets in euro area countries have witnessed an increase in participation rate and a decline in the unemployment rate,0
544,however the employment rate still falls behind the objective of 70 set by the lisbon strategy and unemployment rates remain unacceptably high in a number of euro area countries,0
545,at the same time employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years,0
546,for instance the structural rate of unemployment has decreased substantially in most countries following labour market reforms,0
547,significant progress in reforming labour market policies  especially in the areas of pension schemes early retirement and parttime work  has been achieved over the last ten years in some european countries contributing to the significant rise in the euro area employment rate accompanied by a decline in the aggregate unemployment rate from 106 in 1996 to 72 most recently,0
548,the unemployment rate is still unacceptably high and the employment rates especially among young female and older workers remain low by international standards,0
549,in december 2007 the unemployment rate in these countries was close or below 45 while their overall employment rate was well above the euro area average,0
550,but in the euro area it appears that wage moderation since the setting up of the euro has been a very powerful response to the level of mass unemployment that characterized europe in the 90s,0
551,the wage moderation has been at the root of the remarkable employment success of the euro area with 15 million new net jobs created in nine years 2 million more than in the us during the same period,0
552,1 in november 2007 the euro area unemployment rate as a percentage of the labour force was 72 seasonally adjusted,0
553,flexible labour markets and efficient active labour market policies contribute to shorter periods of unemployment,0
554,in addition early retirement policies have a significant negative impact on labour supply and hence on the participation and employment rate,0
555,for instance in germany the labour market reforms implemented a few years ago have significantly contributed to job creation lower unemployment and the recent economic upswing,0
556,it is encouraging to see that past reforms have contributed to job creation and reduced unemployment,0
557,this approach might lead to support the income of some individuals but also to an increase in inflation and to a generalised loss of employment,0
558,income per capita has gradually been approaching that of the euro area increasing from 74 of the euro area average in 1997 to 85 ten years later while the unemployment rate has remained fairly low standing at between 35 and 5 over the past decade,0
559,as a result of these effects and the impact of labour market reforms unemployment in the euro area has reached low levels not seen for 25 years with the unemployment rate having declined sharply to stand at 73 in september 2007,0
560,previous labour market reforms for example have contributed to robust employment growth and lower unemployment rates in the euro area,0
561,as we have seen this normally results in rising wage pressures despite often high remaining levels of unemployment,0
562,labour mobility may dampen the effects from countryspecific shocks or decrease the risks of wage pressures as labour markets tighten,0
563,employment in the euro area increased by more than two million in 2006 an increase which was in line with the pattern of economic growth and contained real wages reflecting the impact of recent labour market policy measures,0
564,the strength of employment growth also translated into a sizeable reduction in the unemployment rate,0
565,this may be partly linked to the fact that workers in the us have little unemployment protection and low unemployment benefits,0
566,unemployment even though declining recently is still high in many countries,0
567,7 as income tends to be relatively lower when individuals are either very young or retired their savings typically follow a humpshaped pattern with a higher savings rate during their working life,0
568,higher life expectancy may raise the rate at which individuals want to save during their working lives partially reversing the effect which stems from higher oldage dependency ratios,0
569,let me stress that social partners share responsibility for ensuring that wage settlements fully take into account the need to reduce unemployment and to enhance labour market access and employment,0
570,this is mainly the responsibility of the social partners who can see  and should be guided to better recognise  the longterm benefits of wage developments that are conducive to price stability job creation and sustained income growth,0
571,at the same time high unemployment rates in the euro area and in particular unacceptable high youth unemployment rates suggest the need to spur not only labour supply but also labour demand,0
572,the recent and ongoing upswing in economic activity has been accompanied by a significant and steady increase in employment and a decline in the unemployment rate which has dropped to the lowest level 7 since the introduction of the euro in 1999,0
573,this improvement in labour utilisation mainly reflects the significant rise in the euro area overall employment rate from 58 in 1996 to 644 in 2006 accompanied by a decline in the aggregate unemployment rate from 107 to 79,0
574,despite the important progress recorded the overall employment rate in the euro area remains low by international standards 645 in the euro area compared with 72 in the us in 2006 and the unemployment rate is still clearly too high 79 compared with 46 in the us on annual average in 2006 and 70  to be compared to 45  in may this year,0
575,moreover while the primeage male employment rate in the euro area is comparable to that observed in the united states the disparities remain important when we look at the youth female and older worker employment rates,0
576,high unemployment rates in the euro area and in particular unacceptable high youth unemployment rates clearly suggest the need to spur not only labour supply but also labour demand,0
577,in 2006 the unemployment rate in these countries stood below 45 while their overall employment rate was above or close to the us level namely 72 ,0
578,3 there is in particular considerable scope to raise the employment rate of young people and further reform needs to be undertaken to achieve the more ambitious longterm objective of a 75 overall employment rate,0
579,moreover unemployment in the euro area has fallen to 72  its lowest level since 1993,0
580,i also stressed that the current level of unemployment at 71 is the lowest for 25 years,0
581,the euro area overall employment rate significantly increased from 58 in 1996 to 644 in 2006 5 accompanied by a decline in the annual average unemployment rate from 107 to 79,0
582,first of all despite the important progress recorded the overall employment rate in the euro area remains low by international standards 645 in the euro area compared with 72 in the us in 2006 and the unemployment rate is still clearly too high 79 compared with 46 in the us on annual average in 2006 and 71  to be compared to 45  in april this year,0
583,second while the primeage male employment rate in the euro area is comparable to that observed in the united states when we look at the youth female and older worker employment rates the disparities remain important,0
584,the unemployment rate has steadily declined in recent quarters and dropped to 72 in march 2007 the lowest level observed since the introduction of the euro  and indeed since the official series began in 1993  and is expected to decline further in the coming quarters,0
585,over the same period unemployment in the euro area fell by 31 percentage points to 83 in 2006,0
586,while europe is facing a demographic challenge with an increasing shortage of young workers it is striking that youth unemployment is still fairly high,0
587,since 1999 the euro area has witnessed an increase of more than 12 million in the number of people employed and a substantial decline in the unemployment rate from 10 to 79 on average in 2006 and 72  in march 2007,0
588,despite the decline in the euro area average unemployment rate over the last few years unemployment remains too high in several countries and regions of the euro area,0
589,you may recall the debates about the jobless recovery and the labour market policy pursued at that time which aimed in particular at increasing the employment intensity of growth,0
590,slide 11 the higher the education level the higher the participation in the labour force in other words if people are more educated they are more likely to seek or hold a job,0
591,moreover despite the relative improvement in the unemployment and labour force participation rates over the past few years the unemployment rate in the euro area is currently still around 3 percentage points higher and the labour force participation rate around 6 percentage points lower than the corresponding figures for the united states see chart 4,0
592,so although significant progress has been made in raising labour participation and reducing the unemployment rate there is still room to increase the rate of utilisation of the labour force,0
593,in fact it has been estimated that onehalf of the dramatic increase in european unemployment from the golden days of full employment in the 1960s to the high and persistent unemployment levels of the mid1990s can be explained by institutional factors nickell et al 2002,0
594,those who have a job seems to have a negative impact on overall employment since it affects the probability of employment of the outsiders especially women the young and the longterm unemployed,0
595,the lower job turnover and hiring also increases both the duration of unemployment and the proportion of longterm unemployed,0
596,these arguments do not imply that workers cannot be protected against unemployment in an efficient manner,0
597,as a result the rate of longterm unemployment is low,0
598,however when looking at the levels of unemployment and labour force participation rates it is clear that despite the progress made further improvements on both of these labour market fronts are both possible and urgently needed,0
599,furthermore he found that the more people take pride in their work the greater is their participation in the labour market and the larger the reduction in unemployment,0
600,this model has contributed to generating high employment rates in combination with a low risk of poverty and relative income equality,0
601,at the same time a relatively low coverage of unemployment benefits means that the risk of poverty is comparably high,0
602,employment rose by more than 2 million and the unemployment rate decreased further to 75 in the fourth quarter of the year,0
603,employment has risen significantly by more than 12 million people since the launch of the euro and the unemployment rate has steadily declined to the lowest level since 1993 although it is still unacceptably high,0
604,we need a social system that serves as a springboard for higher employment and growth,0
605,euro area annual nominal wage growth has hovered around 2 despite recent oil price shocks hitting the economy and unemployment reaching historical lows,0
606,early retirement policies also have a significant negative effect on labour supply and hence on the participation and employment rates,0
607,at the same time the euro area unemployment rate declined by 3 percentage points to 83 in 2006 7 and estimates of the nonaccelerating inflationary rate of unemployment nairu by international institutions point to a downward trend in structural unemployment,0
608,for example the us met the eus target of 70 for the employment rate of those aged 15 to 64 by 2010 already in 1995 and the us unemployment rate amounted to just 46 in 2006,0
609,9 furthermore the share of longterm unemployed in the euro area stood at an enormously high level of 468 in 2006 implying that almost every second person in the euro area labour force has been unemployed for more than a year,0
610,at the same time although following a downward trend the youth unemployment rate in the euro area amounted to 162 in 2006,0
611,the unemployment rate has dropped since 2004 from 88 to 76 most recently,0
612,these contribute to the still unacceptably high unemployment rates and still relatively low participation rates in labour markets at levels below international standards,0
613,the unemployment rate at 65 in 2006 is also low by european standards,0
614,7  on the other hand a society with a higher old age dependency ratio and fewer young people around is also one in which young workers who realistically can rely less on publicly funded pension schemes have to accumulate a larger amount of financial and real wealth in order to maintain living standards after retirement,0
615,as i mentioned earlier most households do not have the time the skills and the endurance to manage their retirement savings properly,0
616,the slight improvement in labour utilisation mainly reflects the significant rise in the euro area employment rate from 58 in 1996 to 635 in 2005 accompanied by a decline in the aggregate unemployment rate from 107 to 86,0
617,first of all despite the progress recorded on the labour market side the overall employment rate in the euro area remains low by international standards 635 in the euro area compared with 715 in the us in 2005 and the unemployment rate is clearly too high 86 compared with 51 in the us in 20055,0
618,14  high unemployment rates in the euro area and in particular high youth unemployment rates amounting to 178 in 2005 compared with 113 in the us15 clearly suggest the need to spur not only labour supply but also labour demand,0
619,in 2005 the unemployment rate in these countries stood below 50 while their overall employment rate was above or close to the us level,0
620,for example the unemployment rate has fallen continuously since mid2004 from a peak of 89 to below 8 more recently,0
621,the number of unemployed persons has declined by 15 million over the same period,0
622,in addition the unemployment rate has been on a falling trend employment growth has recovered and employment expectations have remained favourable,0
623,indeed it is no coincidence that in countries where the pension system has been equitably reformed in intergenerational terms youth employment is not an issue,0
624,despite solid performance in terms of employment growth in the past five years partly a result of previous structural reforms the euro area employment rate remains low by international standards especially among older age groups,0
625,slide 15 another positive development in the euro area is that labour participation rates have increased mainly thanks to rising employment rates,0
626,for example the unemployment rate has fallen continuously since mid2004 from 89 to 78 in july this year,0
627,the number of unemployed persons has declined by 15 million over the same period to stand in july below 115 million,0
628,1 this mainly reflects the rise in the euro area employment rate from 615 in 2000 to 636 in 20052 which corresponds to the creation of more than 11 millions new jobs over the same period and to a decline in the aggregate unemployment rate from 105 to 86,0
629,8  high unemployment rates in the euro area and in particular high youth unemployment rates amounting to 178 in 2005 clearly suggest the need to spur labour demand,0
630,despite remaining at still unacceptably high levels especially in some euro area countries the unemployment rate in the whole euro area has averaged around 8½ over the past seven years which is more than one percentage point lower on average than in the 1990s,0
631,some observers have argued that european households prefer to work less in comparison with for example us households thus attributing the relatively low participation in the labour market to some deep behavioural motivation or preferences,0
632,indeed in 2005 the employment rate for workers aged 5564 in the euro area was just twothirds of the corresponding figure in the us,0
633,in addition female labour force participation rates in the euro area could also be supported by specific measures like the adequate provision of childcare facilities aiming at reconciling motherhood with professional life,0
634,the unemployment rate is forecast to remain slightly above 8 which is higher than in any other developed economy,0
635,household saving is very high due to adverse demographic developments and the lack of a social safety net,0
636,1 this mainly reflects the rise in the euro area employment rate from 615 in 2000 to 636 in 20052 being accompanied by a significant decline in the aggregate unemployment rate from 105 to 863,0
637,13  high unemployment rates in the euro area and in particular high youth unemployment rates amounting to 178 in 2005 stresses the need to spur not only labour supply but also labour demand,0
638,looking back progress with labour market reforms in the euro area over the last years seems to bear fruit as indicated by the overall decline in the aggregate euro area unemployment rate from 105 in 1995 to 86 in 2005,0
639,however particularly worrying are the still high level of the unemployment rate of young persons aged 1524 amounting to 178 and the still low rate of employment of older workers aged 5564 standing at just 402 in 2005,0
640,in this context a general improvement in the labour market position of young and older persons is of the utmost importance,0
641,in addition reforms are needed that lead to higher labour market participation and lower unemployment,0
642,labour market policies geared towards greater flexibility and increased incentives to work are contributing to a reduction in structural unemployment and to higher participation rates,0
643,labour utilisation which depends on factors such as average hours worked the unemployment rate and the participation rate  that is the percentage of the working age population who are employed or actively seeking employment  can explain a significant part of the disparities in growth,0
644,moreover the unemployment rate remains significantly higher in the euro area than in the us despite a clear improvement in the last decade,0
645,moreover despite some recent improvements in the most recent decade the unemployment rate is significantly higher in the euro area and has declined less since the mid1990s than in the us,0
646,as far as labour markets are concerned both the total and female employment rates are well below the intermediate target levels set in the lisbon agenda,0
647,on the contrary the unemployment rate has averaged around 8½ over the past six years and has therefore been more than one percentage point lower on average than in the 1990s,0
648,annual employment growth in terms of persons employed has doubled from an average of around ½ in the 1980s and 1990s to slightly above 1 since the start of the single monetary policy,0
649,close monitoring of unit labour cost and wage moderation are also in such cases essential to reduce excessively high unemployment,0
650,furthermore despite declining on average since 1996 the unemployment rate in the euro area remains close to 9 which is not by any measure a tolerable level for a developed economy like the euro area,0
651,the average period spent in unemployment will increase and human capital will be eroded,0
652,what was at first a cyclical increase in unemployment may as a result become at least partly structural in nature,0
653,total employment divided by the working age population was negligible or even negative in most new member states,0
654,this latter variable is determined by the labour force participation rate the unemployment rate and the average number of hours worked,0
655,in most countries there has been some progress with labour market reform over the past decade leading to a small reduction in structural unemployment,0
656,nevertheless labour market flexibility needs to be enhanced further especially in view of the large number of people who are wastefully underemployed or unemployed in europe resulting in individual difficulties and welfare losses to society,0
657,despite however the relative improvement in the unemployment and participation rates in the euro area the unemployment rate is currently still 3 percentage points higher and the labour force participation rate around 8 percentage points lower in the euro area than in the united states see slide 7 on the determinants of labour utilisation,0
658,when looking at the levels however of unemployment and labour force participation rates at which these improvements took place as shown in the two charts on slide 7 it is clear that there is no reason for complacency and there is plenty of room for further improvements on both of these labour market fronts in the euro area,0
659,if we take the decomposition in terms of age and gender of participation and employment rates the situation of working age males is fairly similar across european countries and in the united states see slide 10 showing employment rates by age group and gender,0
660,however if we consider that people might demand more leisure as their real income levels go up it is clear that an increasing use of labour both in terms of employment and hours worked does not necessarily imply a welfare improvement,0
661,take sweden and denmark both countries have already exceeded all eu employment targets including those for women and for older workers and their unemployment rates stand below 6,0
662,as far as the labour market is concerned the total and female employment rates are a long way off the intermediate targets set in the lisbon agenda,0
663,this trend should persist for some time in view of the high level of unemployment in the euro area,0
664,a more courageous attitude could have suggested that labour mobility is entirely desirable,0
665,among the ten unemployment benefit systems tend to be more employmentfriendly replacement ratios are generally lower and benefits are granted for shorter periods than in euro area countries,0
666,recent wage developments have been moderate and this trend is expected to continue for some time to come in view of the still high level of unemployment in the euro area,0
667,total employment divided by working age population has been negligible or even negative in most new member states,0
668,hungary appears to be a notable exception where the improvement of the employment rate has been a more substantial contributor to per capita income growth than in the eu15 as a whole,0
669,recent wage developments have been moderate and this trend is expected to continue for some time to come in view of the continued high level of unemployment in the euro area,0
670,particularly difficult challenges for europe include reducing the high level of structural unemployment including youth unemployment and increasing the relatively low level of labour market participation particularly of older workers that persist in european labour markets,0
671,but more progress of this type is necessary to attract more people into the labour market particularly as europes population becomes older in the face of demographic change,0
672,this scenario is based on the assumption that wages will continue to develop moderately at a time when unemployment is still high,0
673,these policies seem to have contributed to the strong employment growth and to the considerable decline in unemployment during the cyclical upswing between 1997 and 2000,0
674,in this regard a cause for particular concern is that the level of euro area unemployment of young people aged 1524 still amounted to 158 in 2002 despite a significant decline since the mid1990s,0
675,this is all the more problematic as youth unemployment signals a particularly mediocre functioning of that segment of the labour market,0
676,the rate of youth unemployment was more than double that of adult unemployment,0
677,furthermore unemployment was dramatically reduced through a more efficient matching of individuals and job vacancies,0
678,whereas for example significant progress has been made to raise female employment employment growth for older workers aged 5564 would have to substantially exceed its annual average of 17 between 1996 and 2002 to achieve the employment target for older workers of 50 by 2010,0
679,in some countries significant achievements in terms of lower unemployment are already visible,0
680,in the netherlands for instance reforms in social security and the development of parttime and flextime employment have contributed to a substantial increase of the employment rate and the integration of an increasing number of women in the labour market,0
681,demographic change adds moreover further stress to the existing systems by increasingly putting the financial burden on a diminishing number of people in the labour market,0
682,in my view lower participation rates and shorter working hours in europe can be ascribed to a considerable extent more to rigid labour market institutions and the disincentives set by tax and social security systems than to the free choice of individuals to work less or stay unemployed,0
683,this will help to increase the employment opportunities for those who face particular difficulties in the labour market such as women the youngest the oldest age and the lowest educated groups,0
684,output growth became more job intensive towards the end of the 1990s and the estimates of the natural rate of unemployment nairu in the euro zone tend to show a decline in structural unemployment from the mid1990s,0
685,however the high level of average unemployment and the relatively low average employment rate in the euro area which in 2002 was still around 62 compared for example to the united states with almost 75 indicate that much more needs to be done,0
686,first the rate of structural unemployment is unacceptably high and employment growth and labour participation are too low,0
687,high unemployment in some cases combined with poverty is probably the most pressing one,0
688,consequently average annual real gdp growth is projected to approach its potential level in 2005 while unemployment is not expected to fall next year,0
689,labour market reforms should now focus on reducing high structural unemployment and increasing participation and employment rates,0
690,1996 2000 who have calculated that in the face of downward nominal wage rigidity an attempt to reduce inflation from 3 to zero would raise us equilibrium unemployment by 26 percentage points,0
691,therefore a permanently higher rate of unemployment can emerge at a very low rate of inflation,0
692,for instance by reforming labour market institutions it should be possible to reduce structural unemployment,0
693,akerlof dickens and perry 1996 2000 building on the ideas of tobin contended that at very low inflation a permanently higher rate of unemployment can emerge and that consequently a moderate inflation rate may be necessary to grease the wheels of the labour market,0
694,in particular they calculated that in the face of downward wage rigidity an attempt to reduce inflation from 3 to zero would raise the equilibrium rate of unemployment in the united states by 26 percentage points,0
695,more specifically i mean that the downward responsiveness of real wages to the level of unemployment is more limited in europe than in the us,0
696,the unemployment rate in the euro area has declined from almost 11 in 1997 to slightly more than 8 in 2001 which is still too high,0
697,looking ahead it is crucial that social partners continue to adhere to moderate wage developments since this is one of the prerequisites in fostering employment and maintaining a favourable outlook for price stability in the medium term,0
698,this would further expand trend potential growth and thereby create supported by wage moderation the conditions for reducing the high level of structural unemployment in the euro area,0
699,unemployment over a period of 5 years has come down from more than 10 of the working population in the euro area to at the moment 84,0
700,the improvements in the functioning of markets together with wage moderation have contributed to strong employment growth and a considerable reduction in unemployment over the past couple of years,0
701,the potential benefits in terms of higher aggregate welfare and employment growth of reforming euro area labour markets are high,0
702,these include the stronger employment growth and the sharp decline in unemployment rates recorded in the euro area in recent years,0
703,such labour mismatches demonstrate that more reforms are needed not only to increase labour supply and demand and improve job creation but also to increase the likelihood that vacancies be filled and the unemployed find work more quickly,0
704,in addition an unemployment rate still above 8 low levels of labour force participation and uneven labour market performances across euro area countries clearly indicate that further measures need to be taken,0
705,this is also a major condition for employment growth and decline in unemployment,0
706,these reforms together with moderate wage developments have contributed to the strong employment growth and the considerable reduction in unemployment witnessed in many euro area countries in the last cyclical upswing,0
707,however unemployment is still intolerably high and much more remains to be done,0
708,to take an example from the labour market the strong employment growth witnessed in recent years suggests that labour market reforms have been progressing in the right direction and in particular it suggests that the process of wage moderation in the euro area during this period has been beneficial,0
709,at the same time however the need for further reform is evident from the still high and persistent levels of unemployment and from low labour market participation in several euro area countries,0
710,it is therefore particularly important to point to the indispensable role of continued wage moderation in fostering employment and maintaining a favourable outlook for price stability,0
711,in particular improving economic welfare has been associated with longer life expectancy,0
712,employment will be growing will be positive and unemployment will continue to fall although more slowly,0
713,our expectation is that the unacceptably high unemployment figures which we have observed and which were coming down very slowly that the downward trend will continue this year next year very slowly and accelerate further in the year thereafter,0
714,with regard to labour markets unemployment has fallen considerably over the past few years to stand at 83 in april 2001,0
715,the number of unemployed has declined by more than one million compared with april of last year even though most recently the decline in unemployment has actually decreased slightly in seasonally adjusted terms,0
716,an unemployment figure of 83 is however much too high,0
717,unemployment  albeit declining  remains too high,0
718,the area of labour markets is particularly important if the unemployment rate is to be lowered in a lasting manner,0
719,the latter is indicated by a robust growth in employment and a further decline in the unemployment rate,0
720,contrary to the experience of the 1970s the 1980s and the first half of the 1990s the present historically low unemployment rate has not been sparking an acceleration of inflation,0
721,however the degree of labour market flexibility depends not only on regulations and the design of social welfare systems but also very much on education demography national and regional traditions overall mentality and attitudes,0
722,consumer confidence has thus probably been supported by the continuous decline in unemployment which stood at 89 in november 2000 the lowest level since mid1992,0
723,reforms aimed at fostering labour force participation are necessary to offset the low growth in the working age population associated with demographic effects which would otherwise restrain the growth of the labour supply,0
724,the pace of new job creation has remained high and the unemployment rate currently stands at 90 a level not seen since mid1992,0
725,employment grew by 18 in 1999 and by over 2 in the first half of 2000 and since the start of monetary union the unemployment rate in the euro area has fallen by 15 percentage points,0
726,wage moderation has made an important contribution to the progress observed thus far in job creation and in reducing unemployment,0
727,among these challenges numbers the continuing problem of high unemployment,0
728,shortrun deviations from the primary objective which we observed in past months should clearly not be taken as a reason to end the process of wage moderation which has been so effective in contributing to the reduction of unemployment which we observed over the last years,0
729,there is a broad consensus that the larger part of the still high unemployment in the euro area is of a structural nature,0
730,first favourable wage developments will be one key factor to ensure the continuation of robust economic growth and the reduction in unemployment in the medium term,0
731,the structural reform of labour and product markets remains the key to achieving significant reductions in unemployment,0
732,there is by now broad consensus on the fact that the larger part of the still very high level of unemployment in the euro area is of a structural nature,0
733,the current level of unemployment in the euro area despite some decline is still too high,0
734,we will have unemployment falling  not by very much admittedly  but that is not the fault of increased growth but it will be falling,0
735,in the year 2002 we expect on current foresight that the average unemployment figure in europe  i am talking about 2002  will for the first time in many years start with a 7,0
736,thus even in equilibrium it is argued that a permanently higher level of unemployment will prevail under low inflation,0
737,the idea is that even a temporary shock may have permanent effects on unemployment,0
738,in europe  unemployment has risen substantially while labour force participation has stagnated with the result that the percentage of the working age population in employment has fallen by 4 percentage points over the last 30 years,0
739,similarly lasting wage moderation which does not lead to inflation expectations and which takes into account the high level of unemployment within the euro area will improve the outlook for price developments as well as the overall prospects for employment and growth,0
740,structural rigidities in the labour markets for instance and misguided incentives provided by the national social security and welfare systems are considered the major causes of the unacceptably high level of unemployment in the euro area,0
741,in fact wage moderation would help both to contain inflation in the euro area and lead to further progress in employment creation,0
742,continued employment growth and further reductions in unemployment should help to sustain it at this high level,0
743,there is now a broad consensus that the larger part of the still very high unemployment is of a structural nature,0
744,this is a crucial challenge if one wants to significantly reduce unemployment,0
745,over the next months it is particularly important that social partners keep wage increases in line with price stability as well as being supportive of further growth in employment,0
746,the rate of unemployment in the euro area has fallen throughout 1999 but still remains high,0
747,a lasting reduction in unemployment could be achieved only if further progress is made in structural reforms aimed at promoting flexibility on the labour market providing jobs to low skilled workers and facilitating the return to the job market of the longterm unemployed,0
748,even if we see some progress in reducing unemployment in the euro area over recent months this problem is still pressing,0
749,second there are active labour market measures which provide programmes of education training and work experience targeted at the longterm unemployed,0
750,social partners remain principally responsible for reconciling high employment with appropriate wage settlements,0
751,the current situation with regard to employment and unemployment differs indeed widely within the euro area,0
752,price stability is especially beneficial for the less welloff sections of society which often lack sufficient information to protect their savings in a period of inflation,0
753,while there has been some cyclical variation in the average european unemployment rate there has also been an upward trend and the rate appears to have risen with each passing cycle,0
754,moreover the duration of unemployment shows that europes unemployment problem is principally one of longterm unemployment,0
755,long periods of unemployment are often associated with a loss of skills and thus a severe worsening of reemployment prospects,0
756,a significant and lasting reduction in unemployment would clearly be a major economic milestone for a social europe,0
757,unemployment is a waste of resources leaves human potential unused is a source of frustration and ultimately undermines the stability of our societies,0
758,the labour market in the euro area prospects and challenges     net employment growth in the euro area has over a longer period of time been insufficient to bring about a significant and lasting reduction in unemployment,0
759,as you all know for a realistic assessment of the labour market situation it is important to bear in mind that unemployment in the euro area is predominantly of a structural rather than a conjunctural nature,0
760,moreover if one examines the duration of unemployment it is immediately apparent that europes unemployment problem is principally one of longterm unemployment,0
761,long periods of unemployment are often associated with a loss of skills and thus a severe decline in reemployment prospects,0
762,according to oecd figures around half of the unemployed in europe have been out of work for at least a year while the corresponding proportion in the united states is less than 10,0
763,in particular this is true for the high and persistent level of unemployment,0
764,the social partners will remain principally responsible for achieving and maintaining high rates of employment and the link between wage settlements and employment will become even tighter,0
765,although inactivity still remains high the rate of unemployment is now one of the lowest in the euro area,0
766,this concerns in particular the high and persistent level of unemployment which is rightly a source of deep concern,0
767,some countries particularly those with more flexible labour markets more moderate wage increases and better tax and social security policies have managed to avoid the trend of everrising unemployment,0
768,the decline in the unemployment rate from its historical peak at 116 in 1983 to todays 32 is indeed impressive,0
769,there is a broad consensus that unemployment in the euro area is overwhelmingly structural in nature,0
770,in those countries where appropriate structural reform has been implemented and wage growth has been moderate unemployment is either low by euro area standards or is falling relatively rapidly,0
771,in an environment in which the unemployment rate stands at around 10 for the euro area as a whole wage moderation is however not only crucial for maintaining price stability but also for helping to improve the labour market situation,0
772,international experience has shown that labour market reform can indeed be effectively implemented in order to combat unemployment,0
773,since the beginning of the year the rate of unemployment has stabilised at around 10 in the euro area,0
774,in those countries where appropriate structural reforms have been implemented and wage growth has been moderate unemployment is either low by euro area standards or is falling more rapidly,0
775,the high level of european unemployment is rightly a source of deep concern,0
776,since 1970 there has been significant cyclical variation in the unemployment rate in the united states but no upward trend,0
777,at 42 in may 1999 the unemployment rate in the united states is almost the same as it was in 1970,0
778,in contrast average european unemployment appears to have risen with each passing economic cycle,0
779,by the early 1980s the unemployment rates in the united states and europe had broadly converged,0
780,despite recording some decline last year the euro area unemployment rate was 104 in april 1999 more than double the corresponding rate in the united states,0
781,according to oecd figures around half of the unemployed of the european union has been out of work for at least a year while in the united states under 10 of the unemployed have been without work for this long,0
782,europe suffers from intolerably high rates of unemployment,0
783,in general labour market conditions in the euro area are expected to continue to improve in 1999 following a decline in unemployment of around 08 percentage point in 1998 which brought the rate down to 106 in january 1999,0
784,a more sustained decline in unemployment requires much stronger structural reforms in a number of countries,0
785,moderate wage settlements in both the public and private sectors would of course contribute to reducing the high level of unemployment in many parts of the euro area,0
786,unemployment is much higher in the euro area 105 and is predominantly of a structural nature,0
787,among these structural features are wage formation wage and nonwage labour costs and the scale and duration of unemployment benefits,0
788,i note with some interest that in this respect denmark has addressed several structural rigidities in the labour market and achieved by european standards a relatively low unemployment rate although further measures may be warranted in order to maintain this favourable situation,0
789,the proportion of longterm unemployed is generally very high in europe,0
790,around half of the unemployed in the eu have been out of work for at least a year while in the united states for example fewer than 10 of the unemployed have been without work for this long,0
791,likewise the rate of decline in unemployment has continued to slow down at the beginning of this year,0
792,the unemployment rate according to data released by eurostat stood at 105 in february,0
793,let me add at this point that i fully share the concerns about the current level of unemployment prevailing in the euro area,0
794,with unemployment figures we say that there have been some elements that show that unemployment is being successfully fought but we all know that if you reduce on a full time basis the 8hour day in the netherlands we get to 25 unemployment really,0
795,even the most successful experiences however have shown that reducing unemployment is a long and gradual process,0
796,structural unemployment may increase the risk of a deflationary spiral because a longer expected duration of unemployment may imply that households respond more conservatively in terms of increasing savings in the face of a deflationary shock,0
797,in contrast average european unemployment has been on a steadily rising path,0
798,even though the euro area unemployment rate fell last year the january 1999 figure of 106 was more than double the corresponding us rate,0
799,some countries particularly those with more flexible labour markets more moderate wage increases and less discouraging tax and social security policies have managed to avoid the trend of everrising unemployment,0
800,first there are active labour market measures to provide education training and work experience  particularly targeted at the longterm unemployed,0
801,they can help to generate net increases in average employment and should not be criticised as wage or social dumping,0
802,at 44 in january 1999 the unemployment rate in the united states is almost the same as it was in 1970,0
803,despite recording a measure of decline last year the euro area unemployment rate remained at 108 in december more than double the corresponding rate in the united states,0
804,moreover continued wage moderation in both the public and private sectors would contribute to the reduction of the unacceptably high level of unemployment in many parts of the euro area,0
805,moreover responsible wage settlements in both the public and private sectors are necessary to reduce the unacceptably high level of unemployment in many parts of the euro area,0
806,the level of unemployment has remained more or less unchanged over the past few months,0
807,moreover continued wage moderation in both the public and private sectors would contribute to reducing the unacceptably high level of unemployment in many parts of the euro area,0
808,however unemployment in the euro area remains very high at 138 million and is declining only gradually,0
809,also the decline in unemployment after having paused in the summer months resumed with the rate of unemployment decreasing from 109 in september to 108 in october,0
810,in particular i share the deep concerns about the unacceptably high level of unemployment in europe,0
811,the private sector also has its part to play notably by exercising wage moderation given the high levels of structural unemployment in the euro area,0
812,however in contrast to these persistently high levels of unemployment  which are largely structural in origin  the prospects for maintaining price stability are currently very encouraging,0
813,unemployment in most eu countries though showing signs of stabilising remains unacceptably high,0
814,unemployment in most member states though showing signs of stabilising remains high and the situation in labour markets is forecast to remain highly unsatisfactory,0
815,while confidence is rising and energy prices have fallen we expect activity to remain weak in the near term,1
816,second due to supply constraints firms in the manufacturing sector continue to have full order books with a backlog of more than five months slide 5 righthand side,1
817,5  potential output growth may be constrained through different channels,1
818,demandside factors by contrast continue to support production,1
819,that is likely to increase costs and affect production while supply chains are adjusting,1
820,but soaring prices for energy and commodities are likely to hurt activity especially in energyintensive sectors,1
821,we have faced both a series of external supply shocks6 and a deterioration in the terms of trade which have pushed up costs for firms and weakened demand,1
822,7 we have also seen firms react to the threat of shortages by ordering more and earlier than usual which has in turn pushed up inflation along the pricing chain a phenomenon known as the bullwhip effect,1
823,this has restricted aggregate supply while also directing demand towards sectors with capacity constraints,1
824,the reason is that when inflation is high everywhere and supply is constrained firms can more easily pass on cost increases to customers without losing market share to their competitors,1
825,a recent survey finds that almost 90 of global firms are expecting to regionalise their production over the next three years,1
826,at the same time domestic policy choices in china as well as us export controls on key technologies are likely to affect chinas place in the global production network,1
827,a second reason is that firms will try to protect their profit margins from higher energy costs,1
828,this suggests that strong pentup demand created an environment for many firms to boost profit margins,1
829,so if the damage or the constraints to the supply side are significant then the impact of a slowdown in demand on capacity utilisation may be smaller limiting downward pressure on prices,1
830,specifically the unprecedented scale of pipeline pressures means that firms may choose not to pass lower real unit labour costs on to consumer prices to protect their profit margins from higher energy costs,1
831,on the contrary if the hit to the supply side is significant there is even a risk that the output gap turns positive earlier than expected despite weakening demand,1
832,in the recent past elastic global supply has meant that shocks to production or energy have dissipated eventually,1
833,a recent survey finds that around 60 of firms had increased their inventories of critical products by the end of 2021 and almost 90 were expecting to regionalise their production over the next three years,1
834,recent analysis however suggests that firms may use price changes observed along the supply chain to form their expectations,1
835,global supply chain disruptions coupled with surging global demand have pushed up prices sharply for industrial goods along the pricing chain,1
836,the economy has faced a series of negative global supply shocks in the form of surging energy and commodity prices compounded by supply bottlenecks,1
837,the higher cost of imports in turn is eating into domestic demand and pulling production away from full capacity reinforcing the wars negative impact on confidence,1
838,it would level the playing field by allowing intermediaries  including small ones which are typically less able to keep pace with innovation  to offer more technologically advanced products at a competitive price,1
839,there is abundant empirical evidence suggesting that the passthrough of input costs is generally weak in the face of adverse supply shocks such as rising energy costs and strong in response to a favourable demand shock,1
840,4  the optimisation of global value chains led to the production of many critical inputs becoming highly concentrated in certain geographical areas,1
841,the reason is that in an environment of buoyant global demand euro area firms have so far been able to measurably increase their export prices thereby recovering a good part of the transfer of income that resulted from the surge in energy and other commodity prices,1
842,the second and related implication is that many firms have been able to expand their unit profits in an environment of global excess demand despite rising energy prices slide 8 righthand chart,1
843,the resilience of profits is particularly evident in those sectors most heavily exposed to global conditions such as the industry and agricultural sector,1
844,one factor that is continuing to support firms pricing power is the persistence of the current shock global excess demand can be expected to decline only gradually,1
845,before the pandemic the integration of many large emerging market economies into global value chains led to an unprecedented rise in global production capacity weighing on inflation,1
846,they adjust their prices according to changes in global demand and supply  whether they export or produce for the domestic market,1
847,the unusually fast rebound in demand was met with a surprisingly sluggish recovery in supply as production took time to come back online after lockdowns,1
848,during 2021 the fasterthanexpected global recovery  in combination with the asymmetric and idiosyncratic nature of the impact of the pandemic across industries and regions  helps to explain the emergence of sectoral demandsupply mismatches bottlenecks and the jump in energy prices,1
849,however in the middle panel we see that this resilience did not hold for export orders which have declined more than total orders since the war and the covid wave in china are already affecting the external sector,1
850,as business leaders all of you here are grappling with the effects of these multiple crises in one form or another  be it the burden of supply chain disruptions high energy prices or general uncertainty about the economic outlook,1
851,as global supply chains have become progressively leaner and more efficient through justintime production they have also become extremely vulnerable to disruptions in the face of global shocks that affect multiple sectors at once,1
852,but that does not in the first instance mean that they will seek to deglobalise and reshore production,1
853,international firms will still face strong incentives to organise production where costs are lowest but geopolitical imperatives might restrict the perimeter in which they can do so,1
854,22 in the united states almost 40 of members of the uschina business council have moved sourcing due to uncertainties about supply,1
855,regions will increasingly have to source their critical inputs from a smaller pool of potential suppliers that are deemed reliable and in line with their shared strategic interests,1
856,but the growth momentum weakened in the final quarter of last year amid a new pandemic wave driven by the omicron variant the increase in energy prices and supply bottlenecks,1
857,remuneration is found to be one of the most important attributes that affects the potential demand for cbdcs,1
858,in other words support to both demand and supply were necessary to escape the low growth trap,1
859,business expectations for activity in a years time have also slumped foreshadowing lower investment,1
860,historical decompositions are based on a vector autoregression including a bottleneck proxy oil prices hicp neig producer prices industrial production and export and import volumes,1
861,second business investment is likely to be affected,1
862,the exit from the pandemic is characterised by global mismatches between demand and supply  in energy and goods markets in particular  with uneven effects across sectors,1
863,in particular the level of excess capacity in global manufacturing might be structurally diminishing to the extent that china has embarked on a transition from an exportled to a domesticallyfocused economy,1
864,since the 1970s sharp movements in energy prices have been a recurring source of economic dislocations and volatility,1
865,this is leading to a temporary spike in the price level which acts as a tax on consumption and a brake on production over time generating effects akin to an adverse demand shock,1
866,on the supply side manufacturers are facing acute shortages of key inputs which are then being exacerbated by the bullwhip effect  a situation where firms encountering higher demand are placing larger and earlier orders than necessary to ensure goods keep flowing out the door,1
867,this is clear from the fact that inflation is rising but growth is losing momentum in the near term as supply disruptions constrain production and higher energy prices eat into demand,1
868,but there are concerns that the slowdown may be more abrupt and more enduring as the headwinds of higher energy prices and more persistent supply chain disruptions continue to feed through the global and euro area economies,1
869,in a competitive economy supply will eventually catch up with demand even if it takes longer than previously expected,1
870,companies operating at the earlier stages of the valueadded chain are producing at full capacity while firms at the final stages are facing an unprecedented wedge between the amount of orders on the one side and production activity on the other,1
871,at the same time growth momentum is moderating to some extent owing to supply bottlenecks and the rise in energy prices,1
872,however a byproduct of an unexpectedlystrong recovery is that there have been extensive demandsupply mismatches in the global markets for commodities and manufactured goods which have been exacerbated by some sectorspecific supply disruptions including in the semiconductor industry,1
873,however growth momentum is moderating somewhat owing to the effects of supply bottlenecks and the rise in energy prices,1
874,as demand moves towards the sectors of the future supply needs to be able to adjust with it,1
875,the ability to rotate demand from the domestic economy to the rest of the world provided a crucial outlet for producers,1
876,18  but reorganisation of this nature could have implications for the composition of global demand,1
877,there is already evidence that companies hold higher levels of foreign inputs that are more difficult to source20 and changes in these inventories play a key role in the dynamics of international trade,1
878,companies run down inventories when uncertainty rises during recessions  sharply cutting foreign orders21  and trade only recovers when inventories have been stabilised22,1
879,we continue to view this upswing as being largely driven by temporary factors especially the strong recovery in oil prices from the sharp drop in spring 2020 the reversal of the temporary vat reduction in germany and cost pressures arising from temporary shortages of materials and equipment,1
880,moreover in examining the implications of the current increase in energy prices it is necessary to take into account the full macroeconomic implications of adverse external shocks and supply shocks in the energy sector including the associated headwinds for the economic outlook and the negative wealth effect associated with a deterioration in the terms of trade,1
881,first continued supply chain disruptions augmented by the global economic recovery are pushing up producer prices due to supply and demand imbalances thus feeding into nonenergy industrial goods inflation which has been exceptionally strong recently chart 4 left panel,1
882,we are seeing rising energy prices and supply chain disruptions,1
883,in certain sectors supply shortages are holding back production which is unusual so early in the business cycle,1
884,second imbalances between demand and supply in some sectors are pushing prices up,1
885,for instance todays supply shortages may induce firms to diversify their supply chains or reshore some of their production,1
886,when demand is higher firms can pass on cost increases overproportionally such that profit margins increase,1
887,chief among them are the strong increase in oil prices since around the middle of last year the reversal of the temporary vat reduction in germany and cost pressures arising from temporary shortages of materials and equipment,1
888,for example if the temporary shortages of materials and equipment constrain production more persistently than we currently foresee they could feed through more strongly along the pricing chain,1
889,a strong market presence helps overcome transitory supply and demand imbalances,1
890,the prices of many raw materials have surged strongly when compared with prepandemic levels even when the latest easing in price pressures is taken into account right chart slide 6,1
891,manufacturing production remains robust although supply shortages mainly related to difficulties in procuring materials and equipment could generate some headwinds for industrial activity in the near term,1
892,5 and growing international competition could limit the scope for firms to pass on domestic cost increases to consumers,1
893,but after the crisis lower domestic demand in noncore countries was not offset by higher domestic demand in core countries,1
894,and weaker sales expectations may lead to firms investing less in capacity,1
895,they also need reassurance about future demand and growth,1
896,the latest observation is for the second quarter of 2020 for investment in machinery and equipment and the fourth quarter of 2020 for industrial confidence,1
897,the latest observation is for the third quarter of 2020 for actual demand and the fourth quarter of 2020 for expected demand,1
898,the extent to which these developments have weighed on aggregate demand is subject to controversy however for two main reasons,1
899,successfully sustaining growth requires progress along a number of dimensions but in particular it will be vital to harness the opportunities offered by new technologies,1
900,in turn subdued demand and the weakening of firms balance sheets and profitability are weighing on business investment,1
901,and for as long as demand remains uncertain it is hard to see how business confidence can strengthen and investment can fully recover,1
902,emphasis on greater resilience in supply chains may encourage a return of some production from overseas,1
903,this suggests that a severe downsizing in production capacity would be necessary to produce broadbased supply shortages since there was already excess supply,1
904,for example a set of firms closing their doors due to the lockdown might not only compress production but simultaneously reduce demand in other sectors producing complementary goods,1
905,certainly if firms seek to increase supply chain resilience and manufacturing is reshored it could increase cost pressures by mitigating international competition reducing margins and inducing firms to pass on cost increases,1
906,25manufacturing and retail trade transport including travel accommodation including hotels and food and beverage sectors have been among the largest contributors to developments in investment in machinery and equipment,1
907,this will lead to a shortening of supply chains and a reshoring of production,1
908,onshoring of production and reinforcing of strategic value chains,1
909,in the short run potential output is severely affected by disruptions in global value chains and social distancing measures which constrain the full use of capital,1
910,moreover closer economic integration through global value chains gvcs and the operation of multinational firms are mechanisms that transmit local shocks to other countries and generate more synchronised business cycles,1
911,for instance shifts in demand in one economy can affect demand in upstream economies through trade linkages,1
912,11 by one estimate international inputoutput linkages account for around half of the global component of producer price inflation,1
913,euro area foreign demand could be directly hit as a result of quarantine measures in china and the associated suspension of production lines,1
914,if the virus spreads more widely domestic firms could be more directly affected due for example to supply chain delays,1
915,it is wellknown that many firms routinely absorb shortterm fluctuations in demand exchange rates or production costs in their profit margins,1
916,a modelbased assessment by ecb staff shows that demand shocks  both domestic and foreign  and changes in oil prices are prime sources of fluctuations in profit margins,1
917,in an environment of weak demand for example firms tend to absorb costpush shocks by compressing their price markups,1
918,global value chain participation is measured as the share of gross exports that cross at least three borders,1
919,measuring the real side of globalisation the increase in international trade has been accompanied by the rise of complex production chains involving firms specialising in different stages of production,1
920,the global production network includes both multinational enterprises mnes  large profitable global firms  and also smaller and often highly specialised firms,1
921,in relation to measuring international trade crossborder production arrangements such as contract manufacturing have considerable implications for concepts that are central to the bop,1
922,3in contract manufacturing a firm hires a foreign company to produce a good but retains the ownership of the inputs,1
923,being the worlds largest exporter of manufactured goods and services and the biggest export market for around 80 countries gives the eu considerable power as a global standardsetter too4,1
924,as such they are difficult to detect and even more difficult to prove in particular when they coincide with weak aggregate demand,1
925,there is overwhelming evidence that new firms are more likely to adopt new technologies,1
926,it relies on having firms that are competitive globally and can export to the world when domestic growth falls and it relies on having a strong internal economy which can sustain demand when the global economy weakens,1
927,in this way we could tap into new sources of growth that would otherwise be suppressed,1
928,efforts have so far mostly concerned investments in certain industrial sectors,1
929,german firms last year exported goods to the value of almost 780 billion to other eu member states,1
930,that can happen if for example production standards are lowered in a bid to achieve cost advantages,1
931,this would expose countries to different industrial shocks and business cycles would become less correlated,1
932,1 los angeles is a good setting for me to reflect upon the importance of globalisation around usd 300 billion of us imports and exports pass through the port here every year  around half of which are to or from china  while californian firms are at the forefront of many global industries,1
933,the rest of the world is a major destination for the goods and services these design and produce while providing a broad choice of imports for domestic producers and consumers,1
934,the expansion in international trade has been accompanied by the integration of production activities across borders both through the expansion of multinational firms and the complex production chains that link firms specialising in different production stages across countries chart 3,1
935,similarly in relation to dampening firms can opt to extend overseas production or switch to imported inputs if a boom triggers rising domestic cost pressures,1
936,to the extent that producers and distributors pass through the increases in tariff and nontariff barriers there will be upward pressure on the prices of imported inputs and final products,1
937,trade barriers impede the efficient allocation of production factors across borders and protect domestic industries against foreign competition,1
938,22 in response to uncertainty shocks firms can also adjust their inventory policies by disproportionately cutting their foreign orders of intermediate goods with a disproportionate impact on international trade flows,1
939,other countries may also gain competitiveness visàvis us producers in third markets,1
940,this constitutes a negative demand shock for the rest of the world and is contractionary for trading partners,1
941,while uncertainty about the future of the international trading system is doubtless a key contributor other factors are also contributing to weak international trade such as the rebalancing of the chinese economy away from exportoriented manufacturing towards domesticallyoriented services sectors and a maturing tech cycle which has affected key asian economies through closely integrated supply chains,1
942,one of the factors behind these negative effects is that it makes it easier for highly productive superstar firms to expand into new markets generating efficiency gains in the short run but leading to more concentration in the long run,1
943,investment in these types of input is steadily increasing as a share of overall investment and they are becoming increasingly important for firms success,1
944,2 several key asian economies specialise in tech production with asian tech exports accounting for 10 percent of global trade,1
945,these economies are closely linked to one another through integrated supply chains such that the slowdown in tech production has affected economic activity in a number of countries,1
946,this slowdown was due to a contraction of net exports reflecting the weakness in the external environment while domestic demand remained resilient,1
947,business investment has been slowing down since early 2018 and was relatively subdued in the first half of this year,1
948,further reducing barriers in product and services markets could help to improve firm entry exit and growth,1
949,this reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties which are weighing in particular on the manufacturing sector,1
950,7 firms have unbundled their production networks and relocated production and assembly in line with the relatively lower cost of production,1
951,17  second cee economies have increasingly specialised in certain industries which may have made them more exposed to industryspecific shocks,1
952,23 although the share of services in total global trade has increased somewhat since 1970 they still only account for around a fifth of total global exports today,1
953,so faced with an increase in uncertainty businesses pare back investment plans,1
954,nevertheless since the annual meetings in october 2018 incoming data have been weak in particular in the manufacturing and tradable goods sectors reflecting a slowdown in external demand,1
955,in addition the expansion in global activity is expected to continue although at a slower pace,1
956,the demand component typically affected most by a weaker global environment is investment,1
957,and with stronger demand firms should be able to rebuild margins,1
958,11 more frequent price changes result in a steeper phillips curve  prices react more quickly and strongly to changes in costs and output,1
959,this declining competition is most likely being driven by these global firms,1
960,the digital transformation could change production and distribution methods and affect how firms compete with each other,1
961,digital technologies can reduce the costs of scaling up production and entering certain markets even across borders,1
962,this could limit the productivity benefits from new technologies by creating obstacles to the entry and innovation of new players as well as slowing down the diffusion of innovations to potential competitors,1
963,on the external side preliminary estimates for the fourth quarter of 2018 point to a pickup in net exports after a very weak third quarter,1
964,and around 30 of foreign value added is now created through global value chains,1
965,businesses have capitalised on the advances in transportation telecoms and computing that make it easier to trade globally and fragment production,1
966,as exporters to the eu must meet its standards economies of scale result in the application of those standards to production in all countries,1
967,however over the past few months incoming information has continued to be weaker than expected on account of softer external demand and some country and sectorspecific factors,1
968,and in a complex system of global production chains like the one we have today devaluations can make it harder for businesses to plan,1
969,europewide standards have boosted intraeu value chains by providing more certainty for firms about the quality of production in other countries and encouraging the fragmentation of the production process that is typical of value chains,1
970,for new technology to truly achieve its full effect it has to spread from its creator to other businesses in the economy,1
971,research has revealed a number of factors that can inhibit competitiveness and impede investment decisions,1
972,will productivity growth suffer if firms divert a greater share of their investment towards repair and replacement of existing capital rather than towards research and development,1
973,this growth model relies by and large on deep integration in global production chains,1
974,9 by integrating local firms into global value chains it facilitates the transfer of technology and expertise,1
975,the transfer of technology moreover does not stop at firms directly integrated into global value chains but also extends to their domestic suppliers via local production networks,1
976,global value chains as a source of tfp growth in the future in sum therefore this diagnosis highlights two key facts cesee economies have a lack of capital and a strong reliance on global production processes,1
977,first by providing the market that makes the development of new industries profitable,1
978,the eus single market can be a valuable source of competitive advantage for firms located in cesee economies in particular when competing with other economies at similar stages of development,1
979,this research also suggests that sectoral tfp growth in cee countries depends roughly equally on technology creation at the global value chain frontier and on the ability of national firms to absorb the new technology,1
980,oneoff countryspecific or sectorspecific factors have also contributed to slowing production in recent months,1
981,moreover the slowdown in imports has particularly affected capital and intermediate goods which might signal that firms are scaling back their investment decisions,1
982,8 hurricanes and floods destroy production capacity thereby raising input and output prices,1
983,productivity is more a question of how firms set up the production process than how much is produced,1
984,first support trade and international investment with a view to adapt to and to learn from global firms at the productivity frontier,1
985,210 and more specifically reducing product market regulation and enhancing competition can increase firm churning ie higher firm entry and exit rates which in turn increases total factor productivity see anderton r jarmulska b and di lupidio b,1
986,in the first half of 2018 growth weakened from the very high rates of last year reflecting lower exports,1
987,the number of exporting firms has grown and exports now go to more destinations than in precrisis times,1
988,this slowdown mainly reflects weakness in net trade,1
989,this is where market players can provide added value and create new business opportunities,1
990,intraeu trade growth had stalled since the early 1970s in large part because the common market covered mainly intermediate goods where growth potential was already saturated,1
991,second it was well understood that opening markets could sometimes penalise local producers as well as creating conglomeration effects where industries migrate to the most competitive regions,1
992,productivity growth takes place through two channels innovation and diffusion of new technologies,1
993,in the first half of 2018 growth weakened from its very high rates of last year partly reflecting lower exports compounded by temporary supplyside constraints at national and global level,1
994,the moderation in the first half of 2018 is attributable to a pullback from the high levels of growth in the previous year compounded by some temporary and supplyside factors as well as a weaker impetus from external trade,1
995,this moderation reflects some pullback from last years exceptionally strong growth as well as some temporary and supply side factors,1
996,external demand has been less positive but this may partly reflect a pullback from the very strong export performance of last year as well as temporary factors in our main trading partners,1
997,for instance in the capital goods sector capacity utilisation and backlogssupply delivery times stand at alltime highs,1
998,18 this resulted in a strong export performance but weak domestic demand,1
999,20 the consequences were especially detrimental for the french export sector which suffered significant losses in market share see chart 10 despite the substantial squeeze in profit margins,1
1000,9 this resulted in a strong export performance but weak domestic demand,1
1001,figure 9 world export market share   goods 1999100      sources imf dots and ecb calculations,1
1002,that is firms are unwilling to increase prices even when capacity constraints are kicking in,1
1003,as the cycle matures and we reach the point where capacity is starting to constrain firms in meeting rising demand they could well become readier to bear the fixed costs associated with technology upgrades,1
1004,as i have discussed elsewhere frontier firms in the euro area are generally as productive as their global peers especially in manufacturing,1
1005,some evidence attributes the slowdown to greater dispersion of productivity between frontier and laggard firms capital misallocation and lower business dynamism,1
1006,for example one estimate puts the share of global value chainrelated trade at more than half of exports from many south east asian economies,1
1007,moreover this is not simply because exporting firms are more productive in the first place but also because firms become more productive through exporting,1
1008,strong growth may be leading to higher potential output as crisisinduced hysteresis may be reversed in conditions of stronger demand,1
1009,it is therefore no coincidence that the recovery in trade last year was led by exports of capital goods and intermediate goods both key inputs to investment,1
1010,global value chains involve production processes being split into a number of intermediate steps mainly in order to exploit international factor income differences,1
1011,as a result production has become dispersed across countries and mechanically increased the amount of trade that took place for a given final output,1
1012,in the past we have seen a close relationship between global value chain growth and the share of imports in total output,1
1013,the global integration of china for example not only increased its exports to developed economies but it also increased its imports of raw materials and intermediate goods from neighbouring emerging economies,1
1014,this boosted overall world trade relative to output,1
1015,in other words the share of global value chain related exports and imports in total trade has stabilised,1
1016,this results in a lower trade intensity of demand,1
1017,not only are exporting firms more productive at the outset they increase their productivity in their first year of exporting by more than comparable nonexporting firms,1
1018,these factors include higher demand for euro area exports rising corporate profitability and an increasing use of installed productive capacity,1
1019,our estimate of potential growth has declined substantially over the past two decades  in part due to the decline in multifactor productivity growth,1
1020,business investment also remains on an upswing aided by improvements in corporate profitability,1
1021,business investment is now slightly above the 2007 level,1
1022,in the same context other scholars even identify tailwinds brynjolfsson and mcafee find that technological advance has caused a drastic shift in the means of production simultaneously boosting the productivity of firms which are however difficult to measure with traditional gauges,1
1023,international trade results in a more efficient use of production factors and in specialisation where comparative advantage exists thereby raising productivity growth,1
1024,more frequent price changes result in a steeper phillips curve  prices react more quickly and stronger to changes in output,1
1025,likewise changes in commodity prices feed through into some services items and into industrial goods produced with high energy intensity,1
1026,similarly past reforms in product markets may also have had a positive effect on the supply side by reducing price markups increasing productivity and raising growth potential,1
1027,likewise we see today that firms are absorbing input costs through lower margins due to uncertainty over future demand which would also tend to temper price pressures,1
1028,new technologies invented elsewhere need to be adapted by firms into their own production processes to make them more efficient,1
1029,notes according to the ameco classification tradable sectors include manufacturing wholesale and retail trade transportation and storage and information and communication technology,1
1030,research suggests three main areas that will improve the capacity of and incentives for firms to adopt new technology i investing in human capital and managerial ability ii investment in intangibles and iii improving economic dynamism,1
1031,new technologies often require new structures and a reorganisation of production to maximise efficiency gains,1
1032,economic dynamism  the third main factor increasing absorptive capacity is the framework in which the business operates,1
1033,greater economic dynamism from competition to higher rates of business entry plays an important role in incentivising firms to adopt new technology,1
1034,business investment is also expected to continue recovering amid support from better corporate profitability,1
1035,one such force is a shock to the cost structure of firms deriving for instance from fluctuations in import prices,1
1036,this occurs for instance through competition new businesses which can produce better and at lower cost thanks to innovative methods squeeze out older companies,1
1037,and finally businesses need markets on which they can sell their products,1
1038,the former is about the creation of new technologies at the global frontier and the latter about their spread to other countries and nonfrontier firms that is firms that are less productive than those at the frontier,1
1039,put simply markets are not setting the right incentives for nonfrontier firms to invest in adopting understanding and incorporating new technologies into their production process,1
1040,in other words the laggard firms arent absorbing the new technology and incorporating it into their production processes to increase their efficiency possibly due a lack of competitive pressures,1
1041,although global uncertainties continue to weigh on the outlook for foreign demand and could thereby dampen export growth robust domestic demand should partly counteract the negative impact on growth stemming from the external environment,1
1042,business investment is also expected to continue recovering amid support from a number of factors such as improvements in corporate profitability and a need to modernise the capital stock after years of low investment and physical depreciation,1
1043,prolonged downturns may also cause businesses to become increasingly uncertain about future prospects causing them to delay investment,1
1044,factors such as a decline in the relative price of capital goods have also led to a fall in desired investment,1
1045,as export demand has fallen off in emerging markets since early 2015 the recovery in those economies has provided a cushion for exporters in core economies,1
1046,business investment is also expected to continue recovering amid support from a number of factors such as improved expectations of improving business conditions and a need to modernise the capital stock after years of low investment and physical depreciation,1
1047,at the same time the substantial weakening of the foreign demand outlook since june is expected to dampen export growth,1
1048,the accelerating diffusion of the internet and related digital technologies in recent decades may provide an example of the former while the emergence of china as a global manufacturing hub exemplifies the latter,1
1049,10 in other words  and contrary to what is often claimed  tooweak demand can slow down creative destruction whereas stronger demand can accelerate it,1
1050,the recovery has also withstood a decline in external demand linked to the major slowdown in world trade,1
1051,in fact yearonyear growth even picked up throughout 2015 despite the slump in world imports,1
1052,the same applies to goods markets and the general business environment,1
1053,on the product market side it allows relative prices to adjust more easily across goods and services in response to shifts in aggregate supply and demand which improves price signalling and resource allocation,1
1054,and new challenges have arisen in the face of an uncertain economic outlook especially given the weakness in emerging markets and in commodityproducing sectors,1
1055,countries that have suffered worsening terms of trade have seen a sharp decline in activity while investment in their energy sectors has contracted,1
1056,it had pushed firms to look for new international markets as well,1
1057,7for the importance of withinsector resource reallocation to foster sector and aggregate productivity growth see for example krizan cj foster l and haltiwanger jc 2006 market selection reallocation and restructuring in the us retail trade sector in the 1990s the review of economics and statistics mit press vol,1
1058,this blunts the growthbolstering effect of lower commodity prices,1
1059,domestic demand is replacing foreign demand as the engine of growth and our outlook for the coming years is broadly unchanged,1
1060,my point here is not to disregard the complex interaction between demand and supply factors and the possibility that hysteresis has contributed to the postcrisis slowdown in output growth,1
1061,domestic demand is gradually strengthening and replacing exports as the engine of growth,1
1062,second the increasing international fragmentation of production has given rise to tight links between countries along the global value chain,1
1063,this in turn has negative implications for business,1
1064,but others are related to demand conditions that appear weak even when compared with a longterm potential growth rate that is already disappointingly low,1
1065,specifically  a clark laxton and rose 1996 and macklem 1997 point to the role of capacity constraints during recessions when firms operate below their full capacity if demand is successfully stimulated firms will be able to produce more without incentives to raise prices,1
1066,during boom times when firms operate closer to full capacity additional demand translates into stronger price increases,1
1067,market infrastructures are crucial in supporting this process,1
1068,1 reforms aimed at strengthening competition will not just encourage greater price flexibility but also higher investment as young firms are able to enter new markets and expand more quickly,1
1069,this is because for firms an upward shift in potential growth implies higher expected revenues and higher future profitability which should in turn encourage them to bring forward investment into the present,1
1070,of particular concern is the growth rate of the machinery and equipment stock the most productive component which has slowed the most,1
1071,productivity can be raised through the emergence of new firms using more efficient technologies and by the reallocation of resources among already existing firms,1
1072,the reason is that shocks can change in certain circumstances supply shocks can morph into demand shocks via secondround effects,1
1073,finally they ensure that higher demand is channelled towards the right sectors,1
1074,a possible explanation for these developments however is that adverse cyclical conditions were accompanied by a contemporaneous increase in firms production costs which can force a rise in prices and thus contribute to create sluggish demand conditions,1
1075,an upward shock to total factor productivity is needed but only possible in highly competitive markets,1
1076,11 and this demand may well be backwardlooking  that is delayed projects coming back online,1
1077,our comparative advantage therefore has to come from combining cost competitiveness with specialisation in highvalue added activities  a business model that countries such as germany have successfully demonstrated,1
1078,a second factor stems from waning integration through global supply chains,1
1079,likewise does geographical expansion into foreign markets when it is not accompanied by local knowledge,1
1080,in china demographic developments and declining returns on very high investment in a number of heavy industries are likely to be behind some of the recent growth deceleration,1
1081,this suggests that part of this decline reflects a relative price adjustment needed to restore competitiveness and as i mentioned earlier this is to be welcomed,1
1082,the general situation of lack of internal demand when some external markets start also to decelerate explains that investment is still almost 20 per cent below what it was in 2007 which affects our potential growth,1
1083,this initiative is already showing that we need to augment our analyses with a global value chains dimension as the internationalisation of production matters,1
1084,so rather than picking up during a recession when the opportunity cost of innovation is lower  as a number of theories have suggested in the past  rd investment tends to fall dramatically when demand is low,1
1085,the erpb will bring together representatives from both the supply and demand sides to identify strategic issues and work priorities including business practices requirements and standards and ensure they are addressed,1
1086,this was accompanied by substantial improvements in the export dynamics of these countries,1
1087,in addition since 2012 investment coming from china has caught up with investment flowing into china accounting for 15 and 17 of gdp respectively,1
1088,as a consequence the necessary adjustment of prices and costs to restore competitiveness was slow which exacerbated the negative impact on activity,1
1089,yet we have also seen a strong and thus far persistent contraction in business investment which may weigh on future productivity growth as such investment tends to raise the technology content of capital,1
1090,the incentive for firms to exploit economies of scale invest and innovate  that is to be productive  depends critically on the business environment,1
1091,a recent study found that increasing competition in tradable and nontradable sectors in italy could increase output by 40 in 5 years and 77 in the long run,1
1092,internally the price of nontradable goods should fall more to stimulate demand for them,1
1093,the rotation of internal demand and the improvement in export performance is slowed down,1
1094,greater competition in product markets fosters lower prices through a reduction in firms markups over their marginal costs,1
1095,it also means that a stronger focus on internationally tradable goods and services results in adjustment that is more conducive to growth,1
1096,might they not be merely shortterm developments due to the weakness of business activity in the countries concerned,1
1097,some businesses have reduced their investment because their sales and earnings prospects are muted,1
1098,other businesses regard further investment as unnecessary because they have adequate spare production capacity at their disposal,1
1099,such investment improves conditions for production and thus also attracts new private sector investors,1
1100,looking further ahead we expect output to continue to recover at a slow pace,1
1101,on the other hand we also observe a decline in the contributions from nonenergy industrial goods and most notably services prices  both of which are more closely related to fundamental factors,1
1102,it is not only about exporting but also about investing in the technology and equipment that will deliver competitive advantages in the future,1
1103,in spain for example export volumes are up by more than 20 since 2009,1
1104,even thereafter in many of these countries export growth has been led by significant competitiveness gains,1
1105,price competitiveness is particularly important for greek firms as their exports are largely concentrated in lowtech products,1
1106,attracting productive foreign investment the third challenge for growth is to attract higher foreign investment,1
1107,we are basically running on one engine  net exports the other engine  domestic demand  is sputtering but has not yet really taken off,1
1108,in addition the economic boom prevailing at that time was accompanied by a loss of competitiveness of the regions export sector,1
1109,again we can learn from the asian crisis we need to foster growth and total factor productivity with new business models,1
1110,what we need is investment in new business models that will raise total factor productivity and provide the sources of future growth,1
1111,this can be broadly defined as the ability of firms to remain profitable in an open market economy and to sustain or expand market share,1
1112,this could in turn slow down investment and production and possibly have some adverse impact on prices and inflation,1
1113,export growth should benefit from a recovery in global demand,1
1114,we see this very clearly for instance in the impressive improvement in export performance in ireland spain and portugal and in the recent uptick in industrial production in the latter two countries,1
1115,positive supply side shocks were either generated domestically or imported through an expanded trade intensity of production,1
1116,much of this was driven by an inevitable drop in domestic demand but we have also seen strengthening exports in a global environment that is not really buoyant,1
1117,this is a sign that a genuine structural correction is taking place and resources are being moved from the nontradable sector to the production of traded goods,1
1118,portugals exports of goods and services grew on average by nearly 7 between 2010 and 2012 compared with 44 between 1999 and 2008,1
1119,yet an efficient and resilient market requires a sufficient level of competition,1
1120,according to the latest data your countrys exports have increased notably  by about 20 in volume between 2009 and last year,1
1121,this can lead to incorrect economic decisions if for instance firms wrongly interpret a general price increase as a signal of increased demand for their product,1
1122,countries need competitiveness to sustain growth,1
1123,removing impediments to the efficient use of factors of production helps to enhance the growth potential of each country,1
1124,similarly a country cannot perfectly control the business cycle its income also depends on worldwide conditions that matter for its imports and exports,1
1125,this shows improvements in cost competitiveness and gains in export market shares in most of the countries where the need for adjustment is largest,1
1126,they could greatly benefit from reorienting their productive structure towards more sophisticated products upgrading their quality and redirecting their exports towards strongly growing markets,1
1127,it is this combination of small medium and large firms that gives german industry its uniqueness and resilience,1
1128,i do not deny that there are negative demand effects in the shortterm,1
1129,further increases in commodity prices may also hamper economic activity,1
1130,the outlook is supported by strong export growth to the us and emerging markets,1
1131,they should be producing higher quality and more sophisticated goods and redirecting their exports towards strongly growing markets,1
1132,against this background the domestic environment in which firms operate is central to fostering competitiveness,1
1133,countries whose firms compete successfully in international markets are in general those with better technology a higher degree of openness and greater domestic market competition,1
1134,this process requires going to the root of the loss of competitiveness tackling its sources and enhancing the opportunities for growth,1
1135,these countries therefore need to restore price and cost competitiveness,1
1136,2according to wto data the average growth of world merchandise export volumes per annum was 15 from 1960 to 1990 inclusive as compared to average real gdp growth per annum of 8 over the same period,1
1137,this is the result of a weakening of various components of aggregate demand both domestic and foreign,1
1138,by encouraging industries to embrace the opportunities of globalisation,1
1139,following years of excessive demand growth and serious overheating latvia recorded severe losses in output particularly in 2009 see slide 6 gdp levels,1
1140,potential output is likely to have fallen for a variety of reasons,1
1141,this increase largely reflects higher commodity prices,1
1142,at the same time the outlook for growth in the area of exports and domestic demand is now predicted to improve,1
1143,there are several ways in which faster growth in emes may have a negative impact on advanced economies and dampen their production potential at least for some time,1
1144,however it may take time to develop new sources of supply that can keep up with demand,1
1145,first nontradable goods and nontradable services are important inputs for the production of tradable goods,1
1146,if unit labour costs in the nontradable sector persistently exceed those in the tradable sector firms in export industries may see themselves forced to squeeze their profit margins because they are unable to pass on higher input prices to world prices,1
1147,thus at first the exporting industry might not be doing too badly and export prices remain unaffected,1
1148,b redding s j and p k schott 2007 firms in international trade journal of economic perspectives 21 3 pp,1
1149,available survey data also point to increasing price pressure in the earlier stages of the production process,1
1150,which weigh indirectly on the costs borne by business,1
1151,this can be accomplished through a moderation in costs and prices by producers,1
1152,there is also evidence that globalisation has been depressing prices for core cpi products due to increased global competition in the tradable goods sector 8 while at the same time prices for energy and food products have been pushed up by the demand of those emerging economies that were opening up to the global economy,1
1153,it was not well calibrated for china or the rest of asia either given the underlying growth in these economies and it led to capital inflows which fuel goods and asset price inflation,1
1154,only two things could prevent this 1 the resolution of the global imbalances conundrum with increased demand by emerging countries or 2 a wave of technological innovations which create new needs and new markets,1
1155,also historical experience with exportled economies suggests that there are limits to the process of gaining market share,1
1156,we also need increased product market competition and greater investments in education to facilitate restructuring and to foster innovation and the adoption of new technologies,1
1157,sepa customers would not benefit from economies of scale or competition,1
1158,in this context trade was hit very hard due to a composition effect as it mainly comprises durable goods 5,1
1159,in many cases the restoration of competitiveness does not depend only on correcting relative costs and prices,1
1160,in the fourth quarter of 2008 and the first quarter of 2009 global trade volumes fell by 18 percent,1
1161,3  therefore policies to enhance competition and innovation are needed to speed up restructuring and investment and to create new business opportunities,1
1162,true in those days the initial outlays for setting up a business were relatively modest production facilities were small and machinery was cheap,1
1163,the increases in commodity prices have been supported by dynamic growth in emerging market economies,1
1164,so in 1910 confindustria was designed to inspire and promote an  alleanza tra i produttori which could strengthen existing enterprises and multiply their number,1
1165,as a prime exporter of equipment and machinery this country has particularly suffered from the lopsided composition of the shortfalls in international trade,1
1166,but many times  in the 100 years spanned by confindustria  after a profound crisis italy has gradually moved back to the forefront of innovation and economic excellence,1
1167,you know what economic risk is the risk that your companies face when they introduce new products and new processes,1
1168,indirectly it helps production and trade,1
1169,this upgrade of our production structure will make european  and italian  firms better prepared for international markets,1
1170,when it is high business thrives when it is depressed on the other hand the economy contracts and can even end up in a permanent state of underutilisation of resources,1
1171,risk sharing and industrial specialization regional and international evidence,1
1172,and some countries may continue to have a preference for exports as a key engine of growth despite growing awareness about the need to strengthen domestic demand,1
1173,this is all the more true in the manufacturing industry where decisions on investment are often made with a long time horizon,1
1174,but business investment is likely to be held back by low capacity utilisation weak demand high uncertainty and depressed profits,1
1175,as in the past there is a risk that growth will only rely on exports while domestic demand remains sluggish,1
1176,smes have been widely affected by sluggish demand and a slump in export markets,1
1177,with this successfully achieved the operating environment of smes can be greatly enhanced to the overall benefit of the economy,1
1178,so what will make industry andor customers stop using the old products and switch to sepa,1
1179,as production has declined considerably over the past year firms may have delayed or cancelled investment projects and thus reduced their demand for new loans,1
1180,earlier i mentioned that in a world of perfect competition an industry should attract investment and thus grow until marginal profits are brought down to zero,1
1181,thus business profits might boom which in turn might feed back into a higher rate of investment and even bigger boost in productivity,1
1182,to a large extent this development reflects the fall in production and trade and the ongoing uncertainty regarding the business outlook which has affected demand for financing,1
1183,both external and domestic demand are expected to decline further in 2009 and gradually recover in 2010,1
1184,many sectors have been severely hit by the global turmoil for instance the automotive textile building and tourist industries,1
1185,the case of raw materials the global demand for which increases at a higher rate than supply is wellknown,1
1186,with high volatile inflation it becomes more difficult to distinguish between the two causes and it is more complicated for producers to know whether they should increase production or not,1
1187,this was mainly due to the substantial weakening of global economic activity and the accompanying marked decline in commodity prices,1
1188,the sectors which have been more seriously hit are those that were more exposed to international competition which had grown strongly over the recent years thanks to the global integration of production processes,1
1189,another risk factor for the rebound of world trade over the medium term relates to the fragmented network of production distributed across borders which contributed to maximize efficiency,1
1190,the protectionist pressures and the slowdown in foreign direct investments might lead to a restructuring of production which might take time and turn out to be less flexible and efficient,1
1191,this is the risk that companies face when introducing innovative new products and new processes,1
1192,the fall in commodity prices has also contributed to a significant diminishing of supply chain pressures from very high levels as signalled by strong falls in survey measures on price setting indicators of companies and substantial declines in producer prices at early production stages,1
1193,2 less productive firms by contrast which are unable to bear the transport and other costs related to foreign trade are either forced out of business or remain confined to their domestic market,1
1194,countries in which highly productive firms can thrive are therefore also likely to do better in terms of their overall export performance as this will allow more firms to compete successfully in international markets,1
1195,in general these are countries with more intense domestic market competition better technology and greater openness to foreign competitors,1
1196,more and more goods and services have become tradable and domestic companies have increasingly engaged in international trade,1
1197,2 more particularly once countries become more exposed to trade higher foreign competition will have two impacts on the one hand this will lead to shrinking operating profits of domestic firms in domestic markets which will force the least productive firms to exit the market,1
1198,on the other hand for those firms that are productive enough to cope with the additional costs of foreign activity ie,1
1199,this meant that firms held minimal inventory levels throughout the production chain,1
1200,further unexpected declines in energy prices owing to weak global demand and a sharper or more protracted slowdown in economic activity could reduce price pressures further,1
1201,all these factors are adversely affecting aggregate demand,1
1202,such developments can sometimes go hand in hand with negative demand shocks as is the case at present,1
1203,this depresses aggregate demand which puts additional downward pressure on prices,1
1204,a deflation triggered by a sharp fall in aggregate demand possibly accompanied by unpredictable changes in economic sentiment the keynesian animal spirits which induces producers to cut prices on an ongoing basis is a serious cause for concern particularly if it manifests itself in conjunction with a protracted economic slowdown and risks to financial stability,1
1205,however overall production did not suffer as much during this period,1
1206,since then global economic growth has slowed down sharply and the commodity boom has turned into a bust,1
1207,including manufacturing in terms of value added with an average growth rate of more than 7,1
1208,innovation in manufacturing and retail is about reducing costs inventing new products and markets often as a part of a process of schumpeterian creative destruction,1
1209,second increasing competition by establishing efficient and wellfunctioning product markets is also fundamental,1
1210,nicoletti and others 2006 14 find for instance that restrictive product market regulations slow the process of adjustment through which best practice production techniques spread across borders and new technologies are incorporated into production processes,1
1211,research and development as well as human capital make also valuable contributions to total factor productivity growth,1
1212,ultimately the extent to which price pressures at early and intermediate stages of production feed through the production chain and up to the retail level crucially depends on the pricing behaviour of firms,1
1213,establishing efficient and wellfunctioning product and services markets can boost productivity trends by enhancing the incentive to invest and innovate,1
1214,studies have shown that eservices promise substantial economic benefits both on the demand and the supply side,1
1215,the notable exception is china which continues to experience robust growth only moderately lower than the growth of 115 recorded in 2007,1
1216,3 in 2007 it was estimated that the growth in the demand for oil by china accounted for just over 47  of the increase in total global demand in that year,1
1217,the outlook for the world economy continues to be clouded by several developments    there is the sharp rise in commodity prices,1
1218,in particular resilient growth in asia and in the oilexporting countries has bolstered global growth,1
1219,energy and agricultural products are needed for the production of other goods and services,1
1220,therefore commodity price increases also have  indirect   impacts on inflation through cost pressures in the production chain,1
1221,the extent to which these pressures at earlier stages of production feed into later stages depends crucially on the pricing behaviour of firms,1
1222,competitive markets are key to limiting the extent of such price increases further along the production chain,1
1223,but since oil production and supply is concentrated among far fewer participants than total consumption among consumers suppliers are more likely to factor the risk of future price fluctuations into their economic decisions to a larger extent than any single buyer,1
1224,this may have provided a signal to both consumers and producers that they needed to start adjusting their consumption and investment plans before the economy hits the physical constraints of oil supply,1
1225,for example pagano and pisani 2006 regress the expost realised risk premium on a constant and the degree of variable capacity utilisation in us manufacturing a proxy for the state of the business cycle taking the fitted value as their measure of risk premium,1
1226,however to a large extent there has also been a significant slowdown in total factor productivity tfp growth,1
1227,tfp growth is generally taken as a measure of technological progress and improvement in the organisation and overall efficiency of production,1
1228,there could also be national differences in areas such as industry characteristics investment in research and development rd and innovation,1
1229,diversity may also extend to correcting past excesses in terms of overall cost and price competitiveness particularly in the markets for tradable goods and services,1
1230,one solution  in my view the only solution for commodity importers  is to increase productivity in the goods and services sector,1
1231,on this count there has been a significant expansion in global productive capacity over the last decades,1
1232,4 on the other hand globalisation and its implications for global demand has implied strong increases in other prices,1
1233,increasing competition by establishing efficient and wellfunctioning product markets is equally fundamental,1
1234,it could lead to    improved goods and services such as sepa instruments   improved organisational processes such as supply chain innovation    improved production processes such as specialised payment factories or outsourcing,1
1235,third the production process will be improved,1
1236,while being partly an adjustment to the emergence of new competitors and most notably china and india with lower labour costs this may in principle also reflect losses in price competitiveness against other advanced competitors or a more unfavourable export specialisation,1
1237,nevertheless it is important to note that most other advanced competitors have also experienced export market share losses over the same period,1
1238,on a more positive note recent analyses of highly disaggregated data at the product and variety level further show that instead european firms have gained market shares in the highprice and highquality segment of mature sectors,1
1239,unfavourable price and cost developments thereby often seem to have been a major cause of a weaker export performance,1
1240,for example due to its higher share of capital goods exports germany might have also benefited to a greater extent than both italy and france from the sustained world demand,1
1241,financial development increases the ability of industries to exploit global growth opportunities that may arise from technological innovation unanticipated demand shocks or price changes,1
1242,4 price stability is deemed to be the optimal target to reduce the misallocation of resources across various goodsproducing sectors,1
1243,it increases the scope for efficiency gains through increased specialisation and better use of comparative advantages in the international production of goods and services,1
1244,in the medium to long term this reduces production costs increases the worlds production capacity and generates gains that are passed on to consumers in the form of lower prices for a large number of goods and services,1
1245,4  over the last two to three years however globalisation has also been seen to have an effect on world demand,1
1246,it increases the scope for efficiency gains through specialisation since it allows economies to make better use of their comparative advantage in international production,1
1247,there is good reason for instance to believe that globalisation increases competitive pressures both worldwide and in domestic markets,1
1248,4    beyond this effect the increasing use of international production opportunities based on comparative advantage may lead to a change in the production structure of our economy which would in turn alter the relative scarcity of production factors and thus the response of their prices and the prices of final goods to economic shocks,1
1249,importantly the world economy might be better able to rely on the dynamism of the asiapacific region should growth in other regions lose some momentum,1
1250,this leads to the second prerequisite for higher potential growth increasing competition in order to establish efficient and wellfunctioning product markets,1
1251,15  increasing product market competition  at the eu and national levels  would enable more efficient production structures,1
1252,first falling costs of moving not only goods but also services and information across borders have led to changes in the production processes most notably related to the international fragmentation of production chart 1,1
1253,second there has been a large expansion in global productive capacity on account of the opening up of emerging economies to international trade and production,1
1254,in particular among industrial countries the free flow of capital across borders unleashes competitive pressures that reduce the cost of capital and allows for better sharing of risk for consumers and firms,1
1255,in this respect it is commonly acknowledged that the higher tfp growth in particular in the us reflects at least partly the spillovers from the development and adoption of ict technologies as a socalled general purpose technology that affects the entire production sector,1
1256,following schumpeters definition innovation refers mainly to the introduction of new goods new methods of production the opening of new markets the procurement of new sources of supply and the introduction of new organisational schemes and management practices,1
1257,3 putting aside the opening of new markets and to a certain extent the procurement of new supplies innovation goes hand in hand with new ideas,1
1258,this means that high as well as low levels of competition may discourage innovation,1
1259,first in principle it could contribute to compressing firms pricecost markups as competitive forces resulting from trade openness would depress profit markups of domestic firms competing with international firms,1
1260,together these two economies account for almost a third of world trade,1
1261,differences in trend output growth may for instance reflect diverse initial conditions and catchingup processes in some countries,1
1262,globalisation has certainly been a major driver of the strong growth of extraeuro area imports with outsourcing to lowcost countries and the internationalisation of production playing an important role,1
1263,first deregulate and increase competition in the non traded sectors so as to reduce prices of goods and services not open to competition,1
1264,if you look at world exports of goods and services the combined share of emerging markets doubled between the early 1990s and 2006 to reach roughly 30,1
1265,indias share in world exports of goods and services tripled between the early 1990s and 2006 to close to 15 with a notable acceleration in the last three years due to dynamic exports of services of course including it and itenabled services,1
1266,the ability to shift production seamlessly from the less competitive to the more competitive sectors is a hallmark of countries dealing successfully with globalisation,1
1267,sepa will enhance paneuropean competition and foster integration consolidation and innovation,1
1268,in 2006 china accounted for 142 of total eu imports and 54 of total eu exports,1
1269,indeed most of the rise in the trade deficit of the eu with china is explained by our imports of i information communication technology ict products 33 of total eu imports from china and ii textiles and clothing 132,1
1270,even in the case of socalled hightech goods like ict chinas role is still to a significant extent confined to the labour intensive assembly of electronic components which it imports,1
1271,a key factor has been the increase in trade in intermediate goods and services as a result of the rising internationalisation of production processes,1
1272,in addition globalisation helps to intensify the exchange of investment capital for knowhow between regions,1
1273,i will consider the case of a shock to production costs eg,1
1274,increased competition implies reduced pricing power of firms,1
1275,in response to increases in costs competitive forces may prevent individual firms from adjusting prices by as much as in a lowcompetition environment,1
1276,capacity utilisation has risen over the past two years for manufacturing and services,1
1277,in addition it is commonly acknowledged that the higher tfp growth in particular in the us reflects at least partly the spillovers from the development and adoption of ict technologies as a socalled general purpose technology that affects the entire production sector,1
1278,inward and outward foreign direct investment implies opportunities to learn and adopt technologies and productivityenhancing practices from abroad,1
1279,in order to reap its potential gains globalisation requires economies to adjust to the reallocation of production and the new competition from emerging markets in certain sectors,1
1280,these other factors are i mismeasured production inputs ii omitted variables that are correlated with ict capital and iii the possibility of increasing returns to scale or imperfect competition,1
1281,economies in the region have made extensive use of this potential,1
1282,but globalisation does not only imply the exchange of final goods services and capital but also outsourcing and off shoring of parts of the production chain,1
1283,the productivity of physical capital is typically influenced by two main factors technological progress and the capital intensity of the production process,1
1284,18 the production process would therefore become more capitalintensive and the relative productivity of new capital purchases would be lower,1
1285,however at the same time the sudden emergence of fastgrowing economies in the global economy is exerting upward pressure on prices for energy and raw material prices,1
1286,in this context ulc developments in the industrial sector may be of particular interest given that this sector produces most of the tradables,1
1287,but when the sharp reappraisal of the outlook in 2000 caused the markets to collapse and business investment to enter a prolonged phase of retrenchment capital deepening in the united states was promptly replaced as the main engine of outputperhour growth by extraordinary advancements in total factor productivity,1
1288,as i have argued elsewhere us firms have been able to meet expanding demand with a more efficient organisation of their production processes,1
1289,all in all the technological shock was negative protracted and quantitatively important a primary additional drag on activity in a phase of falling demand and dim economic prospects,1
1290,the ictproducing sector is one of the few in which tfp growth exhibited a better performance in 19962004 compared with 19801995,1
1291,this leads to the second prerequisite for higher medium to longterm growth increasing competition towards establishing efficient and wellfunctioning product markets,1
1292,in addition pricing power in market segments with low competition may increase in such an environment,1
1293,countries or regions whose markets are generally more accessible tend to be associated  ceteris paribus  with tougher competition richer product variety and higher productivity,1
1294,they also tend to be better export bases and therefore attract a greater number of firms from neighbouring countries,1
1295,therefore firms in a large domestic market are better prepared to cope with the structural changes associated with globalisation than firms in smaller and less integrated domestic markets,1
1296,for example national production may be hit in a very asymmetric way by competition from say a lowcost country,1
1297,take for example the differences in competitiveness between german and italian firms stemming from a combination of cost differentials and export specialisation patterns which have created contrasting performances,1
1298,melitz m 2003 the impact of trade on intraindustry reallocations and aggregate industry productivity econometrica 71 pp,1
1299,melitz m and g i p ottaviano 2005 market size trade and productivity nber working paper no 11393 june 2005,1
1300,foreign direct investment fdi flows have also surged leading to an internationalisation of production processes and new ways of doing business as companies have established affiliates abroad both to gain access to foreign markets and to reduce input costs,1
1301,as a result many industries have set up supply chains on a global scale,1
1302,an increasingly decisive factor has been the increase in trade in intermediate goods and services as a result of the rising internationalisation of production processes,1
1303,globalisation also exerts pressure conducive to price stability by strengthening global competition by reducing the ability of firms to fix prices and by exerting pressure on unit production costs in the industrialised countries,1
1304,as a result competitiveness will gradually deteriorate over time reducing demand for goods or services produced by this country or sector,1
1305,14 as an example fully integrated markets across countries mean that a country which is underutilising its capacity can more easily absorb some of the excess demand from overheating countries,1
1306,this would enable more efficient production structures associated with a more competitive price setting,1
1307,if you look at the world exports of goods and services the combined share of emerging markets doubled between the early 1990s and 2006 to reach roughly 30,1
1308,this sharp rise has largely reflected increases in intraindustry trade which are a consequence of the relocation of some of the production processes of western european companies to central and eastern europe,1
1309,in this regard an increased level of product market competition would certainly be beneficial as it would increase the incentives to win new market shares by offering new and more innovative products thus creating a higher demand for rd,1
1310,human capital the structure of production and growth,1
1311,trade in intermediate goods and services as a result of the rising internationalisation of production processes has been a growing driver in this regard,1
1312,emerging market economies are gaining a larger share in the global economy as their product and factor markets become more closely integrated with the rest of the world,1
1313,the integration of these countries and their participation in international supply chains has clearly affected global demand and supply of a broad range of goods and factors,1
1314,this process has been accompanied by a strong rise in foreign direct investment and this in turn has led to new ways of organising and doing business production processes have become increasingly internationalised as companies have established affiliates abroad to gain access to foreign markets and reduce input costs chart 1,1
1315,if consumers start to substitute domestic products with cheaper imported goods domestic firms need to become more competitive in order to avoid losing market share either by cutting costs or squeezing profits,1
1316,firms facing increased competition will come under pressure to innovate because new production technologies increase productivity and reduce production costs,1
1317,finally with lower barriers to flows of information and crossborder production schemes globalisation encourages the transfer of new technologies between countries firms and sectors,1
1318,in other words stronger import competition limits the possibility of domestic firms raising their prices during domestic booms which results in a lower effect of domestic demand on domestic price developments,1
1319,therefore they have less incentive to fully pass on the increase in input prices to consumers because if they did the relative price of their production would increase and their competitiveness could be significantly eroded especially in an increasingly competitive global environment,1
1320,if they mistakenly conclude that they are facing a shock to the aggregate level of prices companies find it optimal to pass on the upsurge in input prices to consumers as they do not perceive that this would make them relatively less competitive,1
1321,on the other hand as i described earlier in more detail more competition in product markets may increase the responsiveness of domestic prices to changes in production costs,1
1322,hence domestic firms may want to take positions in those new markets sooner rather than later,1
1323,it is worth noting that this remarkable result in terms of low inflation has taken place in a context of dramatic changes in relative prices with primary commodities rising sharply while prices of other manufacturing products especially those with a hightech content have fallen,1
1324,1  one obvious explanation is the change in relative prices between primary commodities and manufactured goods which has provided large terms of trade gains to countries with a lower propensity to consume in particular oilexporting countries,1
1325,the motives of production cost savings and new market access resulted in a redistribution of fdi flows and stocks in favour of developing countries mainly situated in asia,1
1326,partly this is explained by imitation of technologies or the assembly of researchintensive products in china rather than their full development and manufacture,1
1327,in this regard an increased level of product market competition would raise incentives to win new market shares by offering new and more innovative products thus creating a higher demand for rd,1
1328,this would support the exploitation of new production possibilities increase entrepreneurial efforts and innovative activity of firms,1
1329,secondly sepa will create a european playing field which will bring significant economies of scale mainly in processing,1
1330,these trends are coupled with the international reallocation of production and specialisation,1
1331,4 the reduction in costs facilitates trade between countries and leads to a reallocation of production,1
1332,in fact the share of both regions in world exports has essentially doubled over the past 15 years to 22 and 4 respectively,1
1333,over this horizon price developments are largely due to the interplay of supply and demand in the goods services and factors markets,1
1334,they have gained better access to new member states markets enabling them to sell their products and obtain cheaper inputs for their production which in turn enhances their productivity visàvis third countries,1
1335,according to a recent eu pilot survey on rd investment european companies expect their global investment in research and development to grow by about 5 per year over the next three years which represents a considerable improvement over recent years,1
1336,regarding product markets empirical studies4 have shown that lack of competition limits production efficiency and reduces the incentive to innovate,1
1337,the acceleration of us productivity in recent years is generally associated with the production and use of information and communication technology ict,1
1338,moreover survey indicators suggest that companies are more and more able to pass higher input costs on to customers indicating increased pricing power in the light of capacity constraints and buoyant demand,1
1339,this enhanced competition will allow for better products services and prices and stimulate innovation,1
1340,also greater financial development allows countries to adopt new production technology faster and stimulates growth through a process of creative destruction by enhancing firms entry,1
1341,there are benefits of intense trade in goods and services,1
1342,the annual growth rate of m3 increased to 88 in april 2006 from 85 in march 2006 supported by the robust expansion of its most liquid components,1
1343,they are increasingly involved in the exchange of goods and capital and can benefit from the transfer of knowhow and technologies,1
1344,arguably us firms have been able to meet expanding demand with a more efficient organisation of the production processes,1
1345,lower rates of investment in some member countries may also reflect some relocation of production to china and other newly industrialised countries where investment rates have been quite high in recent years,1
1346,a lack of competition harms productivity trends by limiting production efficiency and by reducing the incentive to innovate,1
1347,stronger competition stimulates a more efficient use and allocation of resources thereby increasing allocative efficiency exerting downward pressure on costs and triggering price reductions,1
1348,in an economic context globalisation is associated with the growing economic linkages among countries through trade in goods and services free crossborder capital flows and more rapid and widespread diffusion of technology,1
1349,in many countries the operations of foreign affiliates are now extremely important for domestic growth with rising sales value added employment and exports,1
1350,second increasing competition in an effort to establish efficient and wellfunctioning product and service markets is another prerequisite for higher medium to longterm growth,1
1351,companies do not only decide to which countries to export and from which countries to import goods and services but they also decide in which countries to manufacture goods and to provide services,1
1352,in the last three years the world product has grown at a rate of 47 per annum  the highest rate in 30 years for a period of this length,1
1353,one example is the increase in raw materials prices observed in recent years,1
1354,this could be offset in part by an increase in exports to asia if domestic demand in these countries were to rise and to the oilexporting countries,1
1355,increasing competition towards establishing efficient and wellfunctioning product markets is another prerequisite for higher medium to longterm growth,1
1356,15 a lack of competition harms productivity trends by limiting production efficiency and by reducing the incentive to innovate,1
1357,ccps appear to be seeking new business opportunities in an increasingly competitive market,1
1358,this poor performance may be related to increased competition from low productioncost countries that have a pattern of specialisation similar to italy comprising a relatively large share of lowtech products,1
1359,this may gradually intensify interindustry trade and cause each country to become more sensitive to industryspecific shocks,1
1360,structural reforms in product markets implemented in recent years are enhancing competition and have helped improve the business environment,1
1361,a real surge in fdi accompanied the specialisation of manufacturing at the international level,1
1362,europe should indeed benefit in terms of lower prices for firms and consumers enhanced trading volumes and potentially higher levels of productivity and growth,1
1363,several factors are behind the relatively gradual pace of this recovery  including oil price increases the restructuring and reshaping of the productive sector triggered by global competition and a possible decline in potential output growth,1
1364,obviously the only gradual increase in final demand in the course of 2005 partly explains the limited ability of producers to pass on increases in input costs to consumers,1
1365,11 lack of competition in product markets harms productivity trends by limiting production efficiency and by reducing the incentive to innovate,1
1366,it was not by chance that we dealt with this topic our regions are in fact the two most economically integrated in the world as is shown for instance by the relative importance of intraregional trade,1
1367,it matters because it means an efficient market for customers it fosters innovation and competition,1
1368,increasing markets through geographical diversification can lead to efficiency gains via the realisation of economies of scale and scope,1
1369,in a moderate growth environment domesticallyfocused market players will experience pressure on their income and at the same time relatively fixed costs,1
1370,besides the introduction of new products and methods of production marketing efforts and changes in market structures are regarded as carrying out new combinations,1
1371,structures in goods and services markets still present considerable barriers to competition hindering the process of schumpeterian creative destruction and preventing possible productivity gains,1
1372,this disappointing performance reflects the combined influence of several factors and shocks that on the one hand have adversely affected aggregate demand and on the other hand have constrained the expansion of aggregate supply,1
1373,in the case of italy a strong deterioration in its price and nonprice competitiveness in the context of increasing competition from the new eu member states and from noneu countries especially from china may have dampened real activity particularly real exports,1
1374,focusing upon demand components total investment exports and imports have shown a downward dispersion trend since the mid1990s,1
1375,this contributed to a surge in domestic demand in those countries exerting sustained upward pressure on prices particularly in the nontradable goods and services sectors,1
1376,over time this tends to increase demand in that country and reduce it in others,1
1377,since the second half of 2004 high oil prices have featured as a prominent factor in terms of depressing growth forecasts and adversely affecting firms profit margins and private consumption globally,1
1378,for example regions facing a shortfall in demand relative to potential supply or a loss in cost competitiveness need to exhibit lower prices and costs for domestically produced services and goods,1
1379,however it is not only the competitiveness of firms that is of great importance in our economies,1
1380,consequently countries production structures would become less diversified and thus increasingly vulnerable to asymmetric shocks while business cycles would become less synchronised,1
1381,in this case business cycles would become more strongly synchronised through the convergence of factor endowments and technology as well as reduced exchange rate variability which otherwise would tend to weaken intraindustry trade,1
1382,while production specialisation has gradually increased since the 1970s export specialisation appears to have decreased which could be partly explained by the increased importance of intraindustry trade,1
1383,they suggest that the agglomeration of production factors by generating an environment that creates positive externalities the presence of competitors and informal links with complementary businesses the supply of qualified labour and investment capital and the proximity of research capacity is increasingly important and could indeed increase specialisation and reduce crossborder trade within industries,1
1384,it enables the industry to achieve higher productivity and more competitiveness,1
1385,on products creativity of the firms is required to tailor their products towards the needs and desires of customers and to open up new markets,1
1386,in addition enlargement has enhanced the scope for economies of scale as the extension of the internal market increased the size of the market available to suppliers,1
1387,this tends over time to increase demand in that country and to reduce it in others,1
1388,looking further ahead investment is expected to continue to benefit from robust earnings improvements in business efficiency and very favourable financing conditions,1
1389,5 investment in one sector can have positive spillover effects on the productivity of human and physical capital in other sectors,1
1390,more generally one may also think of the effect of higher expected inflation on firms current pricing decisions these will tend to push up the price of their output in order to compensate for the expected increase in marginal costs of production,1
1391,this includes questions such as      does competition from china pose a threat to our economy,1
1392,the main reason is that a growing number of firms in other asian economies have relocated their final assembly sites to china and export final products from there,1
1393,production in the region has been described as being akin to a single production line and by that i mean that there are sites of high skill and productivity such as japan and south korea that provide the most technologically sophisticated goods and components with the more labourintensive products being produced in locations such as china,1
1394,as many of the exports are componentintensive such as electronics in which the asian region excels much regional trade is intraindustry trade in intermediate goods,1
1395,however the main reason for this rapid increase is that the final production stage has been transferred to china from industrialised economies while the actual chinese value added is still estimated to be relatively low,1
1396,over the medium term however china is expected to climb the technology ladder rather quickly aided partly by the dissemination of technology and management skills due to foreign direct investments,1
1397,china is becoming a key player in the global economy not only on the supply side but also on the demand side,1
1398,all these factors have certainly worked against the efforts of italian enterprises to increase their size and to improve competitiveness by renewing their products and reallocating resources towards new more dynamic sectors3 see chart 4,1
1399,transport and transaction costs are reduced opportunities for economies of scale and specialisation in production where countries have a comparative advantage would increase,1
1400,consequently countries production structures would become less diversified and thus increasingly vulnerable to asymmetric shocks while business cycles could become less synchronised,1
1401,such agglomeration of production factors could indeed increase specialisation and reduce crossborder trade within industries,1
1402,however trade exchanges among regional partners remains low in the region especially among andean economies,1
1403,the structural characteristics of the us economy were apparently more conducive to exploiting the opportunities provided by new technologies,1
1404,nevertheless this should be interpreted with caution particularly in light of the very positive output developments that have been observed recently,1
1405,moreover export performance of these countries has remained positive regardless of economic conditions in their main export markets,1
1406,if these were to remain higher than currently expected by markets this would dampen both foreign and domestic demand,1
1407,especially from the mid1980s onwards and during the 1990s world trade expanded substantially more than world output growth in every year with the difference reaching as much as 7 percentage points in some years,1
1408,moreover trade has increasingly expanded and now includes the full spectrum of tradable goods from primary commodities to finished products meaning that many production processes such as automobiles or computers today span not only several economies but also several continents,1
1409,one of the major benefits of globalisation is that emerging and also developing countries are increasingly involved in the exchange of goods and capital and can benefit from the transfer of knowhow and technologies,1
1410,it can increase production when the price increase is only due to overall inflation or it can fail to increase production when the price increase is due to a favourable relative price movement,1
1411,so that goods services capital technologies concepts ideas are moving very rapidly or even instantaneously all over the globe expanding considerably in quality and in quantity the domain of the ricardian comparative advantage,1
1412,second on the domestic side investment should be helped by favourable financing conditions an improvement in corporate earnings and spillover effects from global demand trends,1
1413,and along the way the drive towards reallocation of production and respecialisation will call for changes,1
1414,this will help to smooth the restructuring process in product markets by promoting the entry of new players,1
1415,moreover still persisting stateaid for particular sectors or on an adhoc basis do not create the necessary environment for dynamic product markets with rapid firm entry and exit that is vital for sustained productivity and output growth,1
1416,all things being equal this much more stable environment facilitates decisions by producers investors and consumers,1
1417,furthermore investment growth should benefit from ongoing efforts by firms to enhance productivity and hence profitability,1
1418,the conditions for investment are also improving as a result of firms continued adjustment efforts to enhance productivity and profitability,1
1419,such dynamism should to help boost aggregate demand,1
1420,i see the cyclical downturn triggered mainly by the common shock of a large fall in world trade as a determining factor during this period,1
1421,buiter and grafe 2001 have pointed out that when the structure of demand and production is diversified asymmetric shocks have lower effects,1
1422,likewise when a country experiences a sudden increase in investment returns  for example due to the introduction of new technology  it may not want to finance all of the newly profitable investment projects out of its own current income as that would necessitate a temporary fall in consumption,1
1423,exports and imports account for a large share of production,1
1424,more intense competition requires firms operating in the same market to be more efficient,1
1425,for example if countries in a region mostly engage in intraindustry trade specialisation or are initially susceptible to common demand shocks then business cycles are likely to become more similar across the countries concerned as trade increases,1
1426,cyclical developments in global it demand are likely to influence domestic business conditions in the region in a rather symmetrical manner which in turn would call for improved regional cooperation,1
1427,the classic inventory cycle when following a fall in demand firms are left holding large inventories therefore exacerbating the need to cut production appears to have become less severe,1
1428,possible reasons for this change include a more accurate forecasting of demand the favourable impact of information technology and more flexible production methods allowing for justintime stock management,1
1429,supply quantity and composition adjusts swiftly to changes in the production technology and changes in demand and    incentives for market participants are such that productive improvements are rewarded and thus technological progress promoted,1
1430,intermediaries also benefit from more opportunities for business and from economies of scale,1
1431,it is a common experience around the world that where this avenue is used without endangering competition it can produce the desirable results,1
1432,more intense competition requires higher efficiency of firms operating in the same market,1
1433,according to this idea incumbent firms are not in a position to charge excessively high prices to customers or maintain cost inefficiencies if entry barriers are not prohibitively high since this would attract external competition into the local market,1
1434,when some of its productive sectors notably the traded goods sectors become exposed to international competition this country typically goes through a transitional catchingup period when it may experience in the same sectors productivity growth faster than that attained by more mature participating countries,1
1435,in every country there are several geographical regions and several sectors with different industrial specialisations which react differently to various stimuli or shocks,1
1436,this disappointing performance was the result of an unfortunate combination of adverse supply and demand shocks originating to a large extent from developments in the external environment,1
1437,taken together these adverse shocks led to a protracted weakening in demand  from both the external and the domestic side  and to considerable uncertainty with regard to the outlook for growth,1
1438,it is also the largest trading partner in the world economy accounting for 19 of world exports,1
1439,in addition other nonenergy components of the hicp namely prices of services and industrial goods have been on an upward trend since summer 1999,1
1440,we should not overlook moreover the fact that other nonenergy components of the hicp namely services prices and industrial goods prices saw a broadly upward movement since the summer 1999,1
1441,the responsibility for the structural improvement of the production potential lies with other areas,1
1442,this reinforces the possibilities for producers to exploit the economies of scale that  at least since the work of adam smith  are regarded as one of the main engines driving economic growth and technological progress,1
1443,however given the high degree of differentiation in production and consumption and the increasing synchronisation of continental european business cycles see artis and zhang 1998 i do not think that this is a big disadvantage at present,1
1444,it affects product development the purchasing of input material the production process accounting inventory management marketing sales and customer relations,1
1445,it also contributes to improved factor productivity through a global reorganisation and specialisation of production according to absolute and comparative advantages,1
1446,the direct price effects of innovation come via more efficient production at lower costs,1
1447,in general terms the research and product cycle has been shortened as well as the speed of adoption of new technology,1
1448,to a substantial extent technology dictates how the structure of production is organised,1
1449,at that time production was organised around a beltdrive system which imposed severe restrictions on the physical infrastructure of factories,1
1450,now the situation is entirely different the international investment activity affects practically all industries in manufacturing as well as services and there are opportunities to find funding also for small companies and risky investments,1
1451,if there are limits and restrictions to the choice of the most profitable combination of productive factors firms will be inefficient and the full possibilities of a new technology will not be exploited,1
1452,a contribution was also provided by the higher yearonyear change in prices of nonenergy industrial goods in the hicp to 08 from 06 in august 2000,1
1453,this has bred many new opportunities for businesses to expand both the range and the value of their products,1
1454,if there are limits and restrictions to the adjustment to the most profitable combination of productive factors the levels of investment in the new technologies will be negatively affected accordingly,1
1455,each of these factors will permit better exploitation of emerging technologies and economic opportunities,1
1456,if there are limits and restrictions to the adjustment to the most profitable combination of productive factors the levels of investment in the new technologies will accordingly be affected negatively,1
1457,moreover if the losses in competitiveness are not corrected domestic and foreign markets for some products may be permanently lost damaging longerterm growth prospects,1
1458,second the process of globalisation and increased competition in the markets for goods and some services have stimulated improved efficiency and reduced pricing power,1
1459,only few crossborder mergers have taken place in key manufacturing industries in the 40 years or more following the start of the common market,1
1460,businessmen tend to praise the competition they practise visàvis other firms but they usually blame competition when they suffer as a result of it,1
1461,the recent rapid technological change has fundamentally altered the speed with whichthe interdependencies are forming between different parts of the world and both individual peoples and companies models and possibilities of operation,1
1462,on their own however these favourable factors may not be sufficient to reap fully the potential gains of these new technologies,1
1463,in an area with these characteristics crossborder demand for similar products produced in different member countries is sensitive to price changes,1
1464,the need for improved competitiveness is not restricted to the wholesale business,1
1465,the benefits of such increased competition are also likely to be the largest in small countries where each market segment has traditionally been dominated by only a few domestic companies,1
1466,the recent cyclical movements of production have been driven by export opportunities which are now beginning to benefit from a recovery in world trade enhanced by a favourable competitive position,1
1467,as regards the domestic side prospects are for continued strength in domestic demand,1
1468,in particular there was a further slight rise in business confidence supported by an improvement in production expectations and a more favourable assessment of export order books which may be seen as representing the more forwardlooking components of the survey,1
1469,there is also a rising internationalisation in production which make it increasingly difficult to say where a product has been manufactured,1
1470,production in this sector declined in the last two months of 1998 and industrial confidence continued to deteriorate in the first months of this year largely reflecting a worsening in the assessment of export order books,1
1471,that is mainly the deteriorating demand for our export products,1
1472,such a slowdown is apparent in industrial production growth up to november 1998 in particular in the intermediate goods sector which is particularly sensitive to any deterioration in the external environment,1
1473,order books which overall declined slightly further in december apparently increased again in january particularly with respect to export orders,1
1474,therefore with regard to the cyclical situation recent data seem to confirm our earlier assessment that there are downside risks for output growth and that production may have slowed down around the turn of the year,1
1475,growth has increasingly been driven by domestic demand rather than net exports in the course of 1998,1
1476,the reference value for m3 is consistent with the maintenance of price stability while allowing for sustainable output growth,1
1477,this is partly because the bulk of their trade is with the eu especially france and also because their exports have been less affected by the overall decline in commodity prices,1
1478,on the other hand firms facing international competition normally have to cut profit margins in response to higher unit labour costs in order not to lose their share of the market,1
1479,hence the reduction in the relative role of loans over bonds chart 20 has translated since the global financial crisis into a diminished importance of banks in monetary transmission compared with nbfis,2
1480,it remains important that banks make adequate provisions and undertake prudent capital planning,2
1481,we will continue to set expectations for banks to progressively manage risks on this front,2
1482,our mandate is to keep under control the risks that banks and the financial system are facing and in that capacity we have to look closely at the risks that are building up in the banking sector as a consequence of the climate crisis,2
1483,we need banks to manage these risks in line with the expectations for sound risk management practices that we have published in a supervisory guide in 2020,2
1484,and as supervisors we are concerned about banks ability to successfully execute their plans as most of their implementation practices are not sufficiently effective,2
1485,we expect banks not just to be able to manage these risks in full by the end of 2024 at the latest but to actually be doing so,2
1486,high financial market volatility and associated liquidity challenges have once more highlighted the need to improve margining practices and the ability of nonbanks to meet margin calls in derivatives transactions,2
1487,2 an approach in which these risks are fully integrated into the daytoday activities of our joint supervisory teams who are in constant contact with banks,2
1488,this is why we support the european commissions proposal that banks should be legally required to put in place prudential transition plans which enable them to assess their risk exposures and the effectiveness of their risk controls in a world that is transitioning to net zero,2
1489,the stress test builds on the methodologies developed for the previous climate stress testing exercises in particular the ecbs economywide climate stress test which assessed the impact of physical and transition risks on the corporate loan portfolio of the euro area banking system and the supervisory climate risk stress test conducted with the involvement of the banks,2
1490,16 at the same time in the absence of new operations tltros no longer have a direct accommodative contribution to the marginal funding costs of banks,2
1491,when we asked banks last year to evaluate their own risk management practices in relation to our expectations we found that some of them had already started to identify and manage risks beyond those that are just climaterelated,2
1492,however very few banks back then had actually begun to implement these practices and we made them aware of this gap with regards to our supervisory expectations,2
1493,and we will insist that banks risk management practices are fully aligned with all our expectations by the end of 2024 at the latest,2
1494,i will share some preliminary findings from our review of how banks incorporate ce risks into their risk management practices,2
1495,the silver lining is that the stateoftheart governance and risk management practices now being adopted by some banks confirm that what the ecb is asking is possible,2
1496,they also highlight the need to fully incorporate material risks into banks own internal capital and liquidity adequacy assessment processes,2
1497,moreover the principles expect a banks board and senior management to ensure that the banks internal strategies and risk appetite statements are consistent with any publicly communicated climaterelated strategies and commitments,2
1498,in 2021 we published a report on banks selfassessments of where they stood relative to those expectations and shared some of the good practices we had observed in the banking industry,2
1499,early in 2021 we also asked all banks under our supervision to devise concrete action plans for ensuring full alignment with our expectations,2
1500,this year our joint supervisory teams will complement the srep assessments with their observations from a climate risk stress test and a thematic review on how banks incorporate these risks into their daytoday business,2
1501,we are also launching onsite inspections of banks management of these risks and are rounding off a targeted review focusing on commercial real estate exposures,2
1502,the results from this stress test will complement the information from the thematic review in which we will assess the evolution of the soundness effectiveness and comprehensiveness of banks ce risk management practices as well as their ability to steer their ce risk strategies and risk profiles towards the targets they set forth in their action plans,2
1503,the good news is that one year after my first speech on the state of ce risk management in the euro area banking sector most banks have started to adapt their practices to incorporate ce risks into their daily business,2
1504,and although an increasing number of banks have deemed themselves to be materially exposed to ce risks in the short to medium term there are banks that have still not performed a materiality assessment,2
1505,the governance and risk management practices that some banks have started to adopt confirm that what the ecb is asking of banks can be done,2
1506,for instance in our supervisory dialogue with banks as part of the thematic review we have started to discuss real client cases to understand how thorough banks are being in their assessment of their clients sustainability trajectories,2
1507,i would like to take this opportunity to invite the banks to use these exchanges to share more good practices and to clarify any of their practices that we have so far overlooked,2
1508,having assessed the banks action plans and the progress made in their practices for two years now i see it as reasonable that banks can be fully compliant with all our expectations by the end of 2024 at the latest,2
1509,at the same time however many banks already comply with at least one of the areas of ce risk management the ecb wishes to see developed,2
1510,2 unfortunately too many banks in the banking union still do not possess sufficiently agile it systems to adequately aggregate data on risk appetite risk limits and risk profiles,2
1511,weaknesses in this area are one of the main factors hindering the effectiveness of governance frameworks of these banks,2
1512,they influence the effectiveness of the banks internal governance the soundness of its risk management and therefore the very sustainability of its business,2
1513,tltros influence the transmission of benchmark yields to bank lending conditions as well as overall liquidity conditions in the financial markets,2
1514,financial institutions have limited net exposures on commodity derivatives and banks acting as clearing members are generally safeguarded by robust creditrisk management frameworks,2
1515,16  overall the available research suggests that issuing cbdcs with adequate safeguards can mitigate potential risks to bank intermediation,2
1516,the findings of that annual assessment indicate that significant institutions have maintained solid capital positions with most banks going beyond the levels dictated by capital requirements and guidance,2
1517,it is essential that banks share with their stakeholders detailed information on their exposures to ce  risks,2
1518,and in 2022 we launched the climate risk stress test and a thematic review of how banks incorporate ce risks into their processes a fullyfledged supervisory exercise involving teams responsible for the daytoday supervision of banks,2
1519,at the same time we are gradually integrating ce risks into our regular supervisory methodology and how banks manage these risks will ultimately impact their pillar 2 capital requirements,2
1520,to make it concrete the more transparent banks are about their ce risk profiles and their concrete efforts to align their portfolios with the paris agreement the easier it is for market participants to compare banks reward those which are taking the necessary steps to adopt risk management practices aligned with a carbonneutral economy and reevaluate those with misaligned trajectories,2
1521,banks own shareholders are becoming increasingly demanding too especially concerning banks that have publicly committed to achieving net zero targets,2
1522,we did so precisely to give banks the time and the incentive to improve the quality of their own disclosures in this field,2
1523,the second stocktake published today shows that the quality of banks disclosures has improved since then especially in the areas of risk management governance and business models,2
1524,however we see a considerable disconnect between banks perception of the importance of ce risks as communicated to us the supervisor and what banks choose to publicly disclose,2
1525,in doing so banks will ultimately ensure that their risk profile is transparently and comprehensively reflected in the information they disclose to the public,2
1526,addressing such gaps will also mean banks are well prepared to meet impending technical requirements,2
1527,the ecb in addition publishes a yearly report on banks pillar 3 disclosures where we also have the option to publicly list those banks which repeatedly fail to disclose their ce risks,2
1528,in view of the poor results shown by our stocktake and to assess the extent to which the banks address individual feedback ce risk disclosures will continue to feature prominently in the ecbs supervision,2
1529,for banks to be able to manage their transition risks adequately they need to have information on how their customers are performing relative to a parisaligned transition path,2
1530,our focus today is the current state of ce risk management practices in the banking sector and the ecbs upcoming thematic review of these risks,2
1531,in 2020 we issued the ecb guide on ce risks and in 2021 we conducted a supervisory review of banks approaches to managing these risks based on their own assessments,2
1532,2022 will be the year that ce risks become integrated in the daytoday activities of our joint supervisory teams who are in constant contact with banks,2
1533,all banks that thoroughly assessed their exposure to ce risks concluded that these risks are material,2
1534,in the overwhelming majority of cases the banks that acknowledged the materiality of the ce risks they faced did so for both transition and physical risks,2
1535,despite this broad acknowledgement of the materiality of these risks and thus the need to adequately manage them we see that most banks still have a considerable way to go in developing their risk management capabilities,2
1536,we therefore expect banks to analyse how ce risks can or will affect their portfolios and products over the short medium and long term and under various scenarios too,2
1537,moreover beyond merely formally attributing responsibilities we still see banks making little progress towards more actively managing the ce risks they face,2
1538,even certain banks that recognise the materiality of ce risks have not reported any practices to either reduce or manage their level of risk,2
1539,this year we want to see firm progress in how banks incorporate ce risks in their risk management,2
1540,in doing so banks should adopt a strategic approach to managing these risks using the full array of the risk management instruments at their disposal,2
1541,moreover banks can draw on the industrys good practices that we shared last year in our report,2
1542,rather we are asking banks to fully grasp the physical and transition risks and to actively start managing them with the aim of making their portfolios more resilient to ce risks,2
1543,and this stress test constitutes an unprecedented effort also on our part to understand more fully how far the banks we supervise are exposed to these risks,2
1544,our main goal will be to assess the evolution of the soundness effectiveness and comprehensiveness of banks ce risk management practices as well as their ability to steer their ce risk strategies and risk profiles,2
1545,as part of this exercise we will monitor banks alignment with the supervisory expectations set out in the guide and encourage banks progress towards the industrys best practices,2
1546,as part of the review we will also carefully check whether banks have followed up on any requirements we issued last year,2
1547,those banks that continue to fail to conduct a materiality assessment of ce risks or have not followedup on earlier requirements will start noticing just that,2
1548,42724317 who argue that the vulnerability of banks to asset price bubbles depends on bank and bubble characteristics speaking in favour of a granular response,2
1549,turning from banks to the nonbank financial sector the economic recovery has also reduced credit risk for nonbanks which is converging to prepandemic levels,2
1550,currently few banks have integrated such risks into their existing strategies or risk management processes,2
1551,i will then turn to what ive just referred to as the next important step in risk management  transition planning  and what banks as well as supervisors and other competent authorities need to do in order to make it work,2
1552,if banks fail to meet these milestones competent authorities  including prudential supervisors  will have to take appropriate measures to ensure that this failure does not result in financial risks,2
1553,even if banks comply with our supervisory expectations for the management and disclosure of ce risks that does not automatically mean that they have a pariscompliant transition plan,2
1554,this is why i believe that having in place a formal legally binding requirement to adopt such transition plans will push banks to go beyond the mere pointintime measurement of ce risks and to embark on a thorough assessment of the structural changes that are likely to occur within the industries they derive their business from,2
1555,currently the eba templates provide a snapshot of the channels through which banks can be affected by ce risks,2
1556,transition plans should become the next addition to banks risk management practices,2
1557,but they in no way preempt the supervisory dialogue with banks on their risk management capabilities,2
1558,they are simply another albeit crucial element to ensure that banks manage all material risks one we have been insisting on specifically with regard to ce risks since 2020,2
1559,transition planning is the second step and one that will help banks to effectively develop a mitigation strategy to soften longterm impacts,2
1560,transition planning still concerns risk management capabilities insofar as we expect banks to build on their current ones and apply them extensively,2
1561,in addition we will carry out a full supervisory review of banks practices for incorporating ce risks into their risk frameworks and gradually roll out a dedicated supervisory review and evaluation process methodology that will eventually influence banks minimum capital requirements,2
1562,the safest way to mitigate this risk is for banks to step up their risk management capabilities and clearly map their transitioning strategy,2
1563,the experience from that time shows that the existence of safe deposits other than banks played a substantial role in triggering bank runs,2
1564,next year we will conduct a full supervisory review of banks practices for incorporating climate risks into their risk frameworks as we gradually roll out a dedicated supervisory review and evaluation process methodology that will eventually influence banks pillar 2 capital requirements,2
1565,positive asset quality and financial market developments supported the return of bank profitability to prepandemic levels and the ecbs stress test results published in july showed that the euro area banking system would be resilient to adverse economic developments,2
1566,the ecb reminded banks to remain prudent when deciding on distributions and not to underestimate the risk that additional losses may later have an impact on their capital trajectories,2
1567,and finally the increase of deposit holdings under the control of large stablecoin issuers could make banks deposit base more concentrated and its developments difficult to forecast,2
1568,moreover by increasing the relative returns of bank loans asset purchases also indirectly support the bank loan creation that is further buttressed by the conditionality attached to our tltros,2
1569,almost all banks have developed implementation plans and many have started to progressively improve their practices,2
1570,next year we will conduct a full supervisory review of banks practices for incorporating climate risks into their risk frameworks as we gradually roll out a dedicated supervisory review and evaluation process srep methodology that will eventually influence banks pillar 2 capital requirements,2
1571,it was a granular exercise relying on counterpartylevel climate and financial information collected for millions of companies to which euro area banks are exposed via loans and securities holdings,2
1572,early stages of transmission one reason why the sustained increase in nonbank financial intermediation may indeed matter are systematic differences in the balance sheet structures of banks and nonbanks,2
1573,10 by reducing the return of riskfree assets asset purchases may make lending to firms more attractive for banks,2
1574,similarly the twotier system of reserves helps to protect the bank lending channel by mitigating the impact of negative interest rates on banks profitability,2
1575,the exercise assesses the resilience of banks to various climate scenarios and covers approximately four million companies worldwide and 1600 consolidated banks in other words almost all euro area banks,2
1576,we have issued a guide of our supervisory expectations of how banks should manage and disclose these risks,2
1577,in short almost all banks have developed implementation plans and many have started to progressively improve their practices,2
1578,it is a reminder that the soundness of the global financial system also hinges on us holding the banks accountable for the way they manage climate risk,2
1579,this supervisory exercise will begin with but not be limited to taking stock of banks selfassessments  and it will have important consequences for banks,2
1580,next year we will conduct a full supervisory review of banks practices for incorporating climate risks into their risk frameworks as we gradually roll out a dedicated supervisory review and evaluation process srep methodology that will eventually influence banks pillar 2 requirements,2
1581,this supervisory exercise will also offer banks a strong incentive to bolster their ability to identify and quantify their exposures to climate risks and their tolerance of these risks,2
1582,building on the guide for supervisors of the ngfs it communicates the ecbs understanding of a prudent approach to managing such risks to banks markets and the wider public with the aim of raising banks awareness and preparedness for managing them,2
1583,this task force concluded that climaterelated risks can be captured in risk categories that are already used by financial institutions and reflected in the basel framework for example credit risk market risk liquidity risk and operational risk,2
1584,climate change creates material risks for banks so it is our job to ensure that the banks under our supervision address these risks adequately and proactively,2
1585,as i am sure many of you already know the main risk drivers for banks are physical risks and transition risks,2
1586,where we see that banks are not managing their exposures to climaterelated risks in an adequate manner we can and will draw on the full supervisory toolkit at our disposal to correct that situation,2
1587,when assessing the suitability of prospective members of the management body of banks knowledge and experience of climaterelated and environmental risks will be among the areas of general banking experience against which suitability will be assessed,2
1588,this would lead to the quality of banks assets deteriorating resulting in another challenge for these institutions in the coming period,2
1589,the assumption was that the failure of such banks would not raise financial stability concerns and could be dealt with under national liquidation procedures,2
1590,9 it is also essential that changes in the riskfree curve are transmitted to those benchmark rates that matter for the pricing of financial instruments and bank credit,2
1591,the first step is to obtain clarity on banks asset quality and make sure that they proactively tackle emerging npls,2
1592,our goal here is to ensure that these banks can safely manage their business and risks in and from the continent,2
1593,moreover unlike bank deposits stablecoins do not benefit from deposit guarantee schemes their holders cannot rely on the degree of scrutiny that is now the norm in banking supervision and the issuers do not have access to central bank standing facilities,2
1594,27  banks may start restricting their lending activities the lower yields are and the flatter the yield curve is particularly in an environment in which capital buffers may need rebuilding following the coronavirus covid19 crisis,2
1595,other drivers of the turmoil included regulation and bank internal risk management limits as well as concentrated reserve holdings with a few banks holding large amounts of reserves,2
1596,furthermore it will be important for banks to be willing to use their capital buffers to absorb losses and continue to support lending,2
1597,supervisory authorities are working to ensure that banks can continue to support the recovery by readying them for a potential deterioration in asset quality,2
1598,that is the reason why we will only have this discussion in middecember when we have the renewed certainty of what is the economic fallout and also what is the quality of capital planning of the banks,2
1599,we will review this recommendation in december and unless we conclude that the banks capital projections remain clouded by exceptionally high uncertainty we should revert to our usual supervisory practice of assessing the planned distribution of dividends on a bankbybank basis taking into account the safety and resilience of the banking system as well as the preservation of its intermediation function at a time of deteriorating asset quality and increased capital consumption,2
1600,independent of the ecbs actions banks need to perform proper risk management acknowledge the recognition of impairments and book an appropriate level of provisions,2
1601,the ecb encouraged banks to use their capital and liquidity buffers for lending purposes and loss absorption,2
1602,the red bar measures the takeup of banks that in the ecb banking supervision survey on tltro iii4 use conducted in july 2020 reported that more than 50 of the funds will be allocated as a substitute for market funding sources,2
1603,and while prudent capital planning is the order of the day the current economic uncertainty means that banks are simply unable to forecast their mediumterm capital needs accurately,2
1604,6 we also eased collateral requirements to make sure that banks could make full use of these operations,2
1605,it is precisely through such effects that higher risktaking by banks may be a feature rather than a bug as long as it does not raise financial stability concerns,2
1606,moreover the shock is highlighting the importance of macroprudential policy in both the bank and nonbank financial sectors to safeguard a stable financial system,2
1607,a number of relief measures were adopted to allow banks to temporarily operate below the level of supervisory capital defined by the pillar 2 guidance,2
1608,a resilient financial system is essential to support the recovery address inevitable pressure on bank profitability and reduce overall vulnerability to market volatility,2
1609,it is vital then for financial institutions to understand the risks on their balance sheets,2
1610,8  the risk implications of these close ties between banks and ccps are mutual given the requirement for ccps to always run a matched book and the principle of risksharing and loss mutualisation in ccps,2
1611,16    chart 8  bank return on assets since 2014 and impact of nonstandard measures  in any event the very substantial differences in return on equity across different regions with broadly similar monetary conditions see chart 9 suggest that other factors such as market structure and efficiency are more important in determining the overall profitability of the banking system,2
1612,and our banking supervisors are assessing banks climate risk disclosures and examining how those risks should be embedded in the supervisory process,2
1613,third it is crucial to establish a european deposit insurance scheme or edis to provide uniform protection to depositors within the banking union regardless of their banks location and to help reduce the sovereignbank nexus,2
1614,3  ongoing research at the ecb moreover ecb research has showcased the particular importance of remaining vigilant about banks resilience in episodes of increasing cyclical systemic risk,2
1615,recent work quantifies how exuberant credit and asset price dynamics lead to large downside risks to banklevel return on assets putting a banking systems capital at risk over the medium term,2
1616,in turn by subjecting the banking sector to specific shocks a macroprudential stresstesting framework can help in assessing the capital shortfall in times of stress,2
1617,it is used to address cyclical systemic risks that are common to the entire banking sector,2
1618,the lowerforlonger interest rate environment creates strains on bank profitability with implications for financial stability,2
1619,the industry should therefore responsibly manage users expectations making it clear that losses could occur and they would not be covered by the traditional financial stability net which includes deposit guarantee schemes and central banks role as lenders of last resort,2
1620,important actions in this regard are  the full and timely implementation of international bank regulation standards  countercyclical macroprudential policies for banks  appropriate regulatory and macroprudential frameworks in the nonbanking sector,2
1621,in a similar vein in recognition of the fact that the precrisis financial system was not sufficiently capitalised compared with risk exposures and not sufficiently liquid regulatory reforms have also fuelled demand for safe assets since banks have a reduced risk appetite and are also required to hold more liquid assets,2
1622,still it is also clear that the current system for bearing risk remains far from optimal with the completion of banking union and the deepening of capital markets union offering much potential for risk sharing,2
1623,for example the eba reports that banks have increased their share of high quality liquid assets relative to total assets by over 10 percent since 2016,2
1624,we have built models of bank intermediation that tell us how tighter funding conditions will impact on bank lending,2
1625,how risk adverse should we be when considering this distribution or in other words should we conduct policy on the basis of expected outcomes or with a view to minimising losses in extreme scenarios as we request banks to do when we run our stress tests,2
1626,thanks to them and others our general equilibrium models now feature a fullyfledged banking sector that accounts for the presence of financial frictions and that also allows us to analyse the effects of macroprudential policies,2
1627,bank and financial markets supervisors have to make sense of the complex mesh of principalagent relationships between lenders borrowers and financial intermediaries and to make these contracts incentivecompatible  this requires quite an amount of international organisation and contract theory,2
1628,and second only some banks will face significant increases in capital requirements,2
1629,internal models can no longer be used to assess operational risks it had become clear that they were too complex and led to excessive variability in riskweighted assets and insufficient levels of capital for some banks,2
1630,one idea is to use the reduction in demand for banks to maintain the highest quality capital for some requirements resulting from the changes of the latest banking package,2
1631,4  recent analysis of the 12 largest banks and 14 largest insurers in the euro area shows that information on financial institutions climaterelated risks is scarce and inconsistent,2
1632,there is no consistent classification of firms activities and the data on banks exposures is not granular enough,2
1633,second bailing out banks prevents the nonviable ones from exiting the market,2
1634,facilitating bank ma outright failures are one way for nonviable banks to exit the market,2
1635,likewise when a bank that is in good shape takes over a weaker one this may not necessarily result in a strong institution but could actually lead to a larger less healthy bank,2
1636,but even though banks have improved their capital positions in recent years only a small fraction of bank capital requirements are in the form of the countercyclical capital buffer ccyb which authorities can release in the event of systemic stress to help avoid costly economic deleveraging,2
1637,nonetheless the net external asset position of the banking sector reflects their roles as intermediaries in crossborder payments and as issuers of the bank deposits that form the main instruments for international payments,2
1638,this is because taxpayers may be affected by the way in which microprudential supervision is conducted notwithstanding the intention under the new eu banking resolution regime for the costs of bank failures to be borne by the bank shareholders and creditors,2
1639,a number of liquidity regulations affecting banks such as the net stable funding ratio and the liquidity coverage ratio lcr require banks to hold a sufficient quantity of highquality liquid assets,2
1640,according to data from the us federal deposit insurance corporation fdic 86 of excess reserves are held by just 1 of us banks,2
1641,looking ahead i believe that topdown stress test models could play a more important role in disciplining banks and reducing their incentives to systematically underestimate vulnerabilities,2
1642,once the mda thresholds are breached banks face automatic restrictions on their profit distributions to ensure that they keep funds on their balance sheet,2
1643,fourth forwardlooking banking supervision can urge banks to ensure that they have an overview of the climaterelated risks on their balance sheets and that they do so on a continual basis and with reference to stress scenarios,2
1644,third it is critical that banks contributions to the deposit insurance scheme are riskbased  in other words that the contribution of each bank is based on the institutions default risk and the amounts involved,2
1645,the better performance of some banks within the euro area and in jurisdictions facing similar economic and financial conditions illustrates the importance of addressing structural issues,2
1646,we thus welcome the measures taken by the banking sector in recent years to improve resilience and support efforts to further strengthen resilience while conditions are benign,2
1647,it emerges from deep and resilient financial integration especially of retail banks and that only arises in the shelter of public risksharing such as strong backstops and deposit insurance schemes,2
1648,i will take this opportunity to delve a little deeper into two of the measures that may be especially relevant for the banking sector,2
1649,based on current holdings of excess liquidity the current calibration will entail annual savings for banks of about 4 billion,2
1650,for example the system may induce banks that have an unused exempt tier to increase the amount they borrow from banks that hold more excess liquidity than their exempt tier,2
1651,this was achieved through the publication of consistent and granular data on a bankbybank basis with banks judged to have either passed or failed the test,2
1652,ideally a bottomup approach should also support banks own risk management capacity by forcing them to consider how severe adverse circumstances may affect their solvency,2
1653,i believe the topdown model challenge which has so far taken the form of a dialogue between supervisors and banks could play a greater role in disciplining banks and reducing the incentives for them to systematically underestimate their vulnerabilities,2
1654,in fact doing so would provide market participants with a benchmark against which to judge each individual banks result,2
1655,but it is also possible to carry out a macroprudential exercise that instead focuses on the systemwide impact of adverse shocks on the banking sector as a whole,2
1656,a combined exercise would help banks market participants and regulators to assess the systemwide consequences of banks reactions to situations of stress which would complement the information retrieved from the microprudential stress tests,2
1657,6 this simultaneous publication would provide all stakeholders with a more solid and comprehensive overview of the banking sectors resilience,2
1658,they promote transparency in the banking sector improve market discipline foster banks own risk management capacity and importantly inform prudential decisions of both a microprudential and macroprudential nature,2
1659,3in fact recent empirical evidence suggests that the comprehensive intrusion associated with the ecb stress test quality assurance process has a disciplinary effect on banks risk taking after the stress tests see kok et al,2
1660,and roman ra 2018 lending implications of us bank stress tests costs or benefits journal of financial intermediation vol,2
1661,first to manage expectations about economic outcomes  inflation expectations but also expectations about financial stability and the safety of individual banks,2
1662,when we look at financial stability concerns in nonbanks we are looking less at the riskbearing capacity of the individual institutions balance sheet and more at the potential for contagion and shock amplification through the system and amplification of the broader financial cycle,2
1663,so why does low bank profitability matter for financial stability,2
1664,higher risktaking by banks can cause financial imbalances to build up should risks be correlated,2
1665,a macroprudential exercise conducted in 2018 for banks directly supervised by the ecb4 using the baseline and adverse scenarios of the recent eba stress test confirmed the general resilience of the euro area banking system,2
1666,they aggregate marketspecific indicators related to money bond equity and banking markets thereby offering a comprehensive overview of financial integration in the euro area,2
1667,first we have been conducting thematic reviews since 2015 on the topic in the banks that we directly supervise,2
1668,moreover the latest horizontal analysis of it risk conducted in 2018 has revealed deficiencies in it security risk management at several banks,2
1669,on the basis of the 2018 europeanwide stress test data we estimate that the banks behavioural reaction to the adverse scenario exacerbates the fall in gdp by a further 16 with respect to the initial shock which itself further depletes banks capital,2
1670,7  cyclical factors given that important link between bank behaviour and the cycle let me turn to the cyclical factors affecting bank profitability in the euro area,2
1671,in the area of banking supervision this year the ecb has formally identified climaterelated risk as one of the key risks facing the banking sector,2
1672,we designed a qualitative questionnaire to evaluate how banks integrate climate risks into their strategy and their risk management framework,2
1673,yes it is about governance in banks  whether these types of risk are fully embedded in the risk management framework,2
1674,so we should foster a stronger risk management perspective and techniques with regard to climaterelated risks it is about having an adequate mapping and classification of atrisk assets and including them in banks forwardlooking risk strategies with a longer time horizon than banks commonly use for assessing traditional risks,2
1675,the third risk is that banks intermediation capacity may be hampered by their continued low profitability,2
1676,over the past ten years following the great financial crisis funding strains and subsequently hampered bank intermediation capacity related to low bank profitability have figured prominently in our risk assessments,2
1677,a number of regulatory and policy measures could help to improve the institutional setting in which the banking sector operates and facilitate banks efforts to adjust their business models,2
1678,stress testing exercises of the banking sector assess the sectors resilience and how it performs under adverse circumstances thus providing a measure of the severity of these risks,2
1679,stress tests can therefore show how the financial system will react when risks such as those relating to spillovers materialise,2
1680,9 for instance another finding of the framework is that capitalconstrained banks are more likely to reduce their foreign exposures than their domestic ones,2
1681,i am convinced that risk sensitivity is the only way to give banks effective incentives,2
1682,credit risks and potential losses are thus borne mainly by financial institutions in other eu or noneu countries and once bank shareholders and creditors have been bailed in  taxpayers in those countries may ultimately have to foot the remaining bill,2
1683,in fact what distinguishes a good bank from a bad bank is how it deals with risk,2
1684,we look at whether banks are fully integrating the policies processes controls systems and procedures set out in their raf into their decisionmaking processes and their risk management,2
1685,there were calls to first reduce risks in the banking sector before starting to share them and considerable risk reduction has indeed taken place in recent years,2
1686,i will then turn to the structural changes triggered by new technologies and discuss what they might entail for banks and supervisors,2
1687,or to put it more bluntly as supervisors do we want big banks to rely on a single ccp for important asset classes,2
1688,this is certainly not ideal particularly when it comes to supervising globally active banks,2
1689,i am referring to the bcbs 239 principles for effective risk data aggregation and risk reporting which play a significant role in adequately managing the risks of a bank,2
1690,supervisors set the level of pillar 2 capital to account for risks which are not or are only partially covered by regulatory capital requirements it is thus an important additional tool for making banks more resilient,2
1691,such a change will encourage banks and markets to come up with financial innovations with regard to additional tier 1 capital or at1 for short,2
1692,so it is up to the supervisor to adapt the capital requirements to a banks specific risk profile in order to cater for deviations from the average case,2
1693,beyond our primary mandate for price stability it is worth remembering that we are not regulators neither for financial markets nor for banks,2
1694,and in order to avoid systematic transfers between banking sectors the banks contributions to the fund should be structured to reflect banks risk appetites,2
1695,this is perhaps no surprise as banks engaging in custodian asset management or investment banking activities are likely to be better able to gear themselves towards feegenerating activities whereas commercial banks may not have access to such opportunities for diversification,2
1696,it is thus interesting to look at the broader financial stability challenges for banks over the next couple of years,2
1697,3  in sum there is no reason to be complacent about financial stability risks in the banking sector which could materialise in a number of ways,2
1698,however banks contributions to the deposit insurance fund can be designed to reflect their relative riskiness in terms of npls or sovereign exposures for example,2
1699,and it is of the utmost importance that the large stocks of npls that still remain in some banks are reduced,2
1700,it therefore makes sense to supervise these investment firms as if they were banks in line with the principle that similar risks are treated in a similar manner,2
1701,i will highlight just two of many relevant issues  in general banks now hold more and betterquality capital than in the past,2
1702,and now is a good point to stress that financial stability is also good for the banks themselves,2
1703,all banks also need to further strengthen their risk management frameworks it systems and internal capital and liquidity management,2
1704,another problem is that banks often set the limits so high that they are no of help in steering risk taking,2
1705,at the same time banks entered the exercise in better condition than before owing to overall improved economic conditions and their continued efforts to reduce legacy assets,2
1706,however some of these banks still have work to do to enhance capitalisation and reduce their vulnerability to stress,2
1707,lets take a look at whether we have really succeeded in making the banking sector a safer place,2
1708,for example some banks exploit the fact that prudential requirements are tied to the timing and maturity of transactions,2
1709,in other cases banks artificially reduce the regulatory maturities of transactions through the use or restructuring of derivatives,2
1710,it didnt require supervisors to truly understand the risk profiles of banks and it didnt require them to think ahead and look out for new risks,2
1711,its also about broadening the perspective and using all the available tools to spot trends and anomalies in the behaviour of banks as well as to identify best practices,2
1712,completing the banking union with the establishment of a european deposit insurance scheme its third pillar and firm moves towards capital markets union promoting deep and liquid bond and equity markets in europe are necessary reforms of the financial sector,2
1713,furthermore we continue to devote significant attention to potential valuation issues with a focus on banks that have material exposures to complex financial assets  including but not limited to level 3 assets  through both our offsite and onsite supervisory processes,2
1714,as a banking supervisor the ecb helps to make banks safer sounder and more resilient,2
1715,next to the banking sector is the shadow banking sector defined by the esrb as the sector comprising all assets which are not held by banks insurance companies or central counter parties,2
1716,the first step is for the supervisor to obtain a holistic view of each of these banks not only assessing capital and liquidity risks but also their internal controls and governance,2
1717,banks capacity to absorb losses has been enhanced with minimum requirement for own funds and eligible liabilities mrel being set at eu level and total lossabsorbing capacity tlac for large banks being set at global level,2
1718,and to foster confidence that funds pooled in edis will not lead to systematic transfers between banking sectors banks contributions to the deposit insurance fund can be designed to reflect the relative riskiness of banks following a polluterpays principle,2
1719,authorities have activated their tools to require banks to increase capital,2
1720,macroprudential instruments in the eu are for the most part targeted at the banking sector given the predominance of bankbased finance at the time that the initial response to the global financial crisis was designed,2
1721,it has two main objectives ensuring that banks are sound and encouraging deeper integration in the banking sector,2
1722,risk assessments have become more harmonised and systematic significantly improving the consistency with which capital addons are applied across banks,2
1723,the correlation between banks risk profiles and capital requirements increased to 82 in 2017 from just 40 in 2014,2
1724,for example supervisors have developed analytical tools to carry out detailed comparative assessments of banks business models,2
1725,the resulting divergences in the capital strength of banks undermined confidence in their soundness,2
1726,further efforts are needed from banks supervisors and regulators to reduce the remaining stock of npls especially in those countries where the npl ratio remains high,2
1727,it is crucial that banks have sound and effective valuation and risk management frameworks in place,2
1728,therefore sustained supervisory efforts are needed to identify and address potential problems with banks valuation and classification methods,2
1729,i measure how far we have come by the frequency with which banks ask about changes in supervisory actions,2
1730,in its envisaged steady state as a fully mutualised fund edis would reduce the risk of bank runs and allow full fungibility of deposits across the euro area thereby mitigating the risk of financial fragmentation,2
1731,completing the banking union with the establishment of edis its third pillar and firm moves towards capital markets union promoting deep and liquid bond and equity markets are necessary reforms of the financial sector,2
1732,similarly to definitively break the banksovereign nexus we have to continue to reflect on regulatory instruments to curb the excessive accumulation of sovereign risks on bank balance sheets without triggering market disruptions,2
1733,the regulations that emerged following the crisis have led commercial banks to bolster their risk functions in a number of ways,2
1734,while there are many parallels in the way that we and the commercial banks have managed risks there are also important differences due to our public mission as laid down in our mandate,2
1735,so unlike commercial banks whose fiduciary responsibility is to maximise their financial income central banks have to consider the wider macroeconomic picture when they set their risk management frameworks,2
1736,5 but valueatrisk approaches mean that the risk management of banks relies on measured risks,2
1737,and third we are requiring banks to improve their risk management for instance with regard to the internal models they use to calculate the risks associated with the assets they hold,2
1738,they specialise in managing counterparty credit risk and by doing so they reduce the risk of defaults spreading across the financial system,2
1739,given that the reduction of risk is a major reason for a costly diversification requirement results suggest caution before their adoption this result is intuitive if one thinks that diversification spreads lower quality securities over all the banks which is compound by adding network effects that the authors duly consider,2
1740,21 in other words maturity transformation still plays an important role but it is no longer the sole preserve of banks,2
1741,25 moreover investors are limited in what they can invest with banks due to their own risk control frameworks,2
1742,if all banks had the same business model they would all be exposed to similar risks,2
1743,it helps to make the single market more single it contributes to safer and sounder banks by making them more resilient and it helps to foster financial stability by enabling banks to fail in an orderly manner,2
1744,and the new eu resolution framework has shifted the cost of bank failures away from sovereigns and onto the financial sector which creates another channel of private risksharing,2
1745,the increase in financial institutions demand for ecb liquidity led to a progressive and sizable increase in bank reserves,2
1746,this reduces the risks of spillovers from bank failures to sovereigns and provides a common framework conducive to further integration in the banking markets a process which has been lagging,2
1747,for this reason a crucial element of a fullyfledged edis would consist of riskadjusted contributions to the fund based on bankspecific strengths and weaknesses benchmarked at the banking union level,2
1748,furthermore in cases where level 3 assets are material for specific banks we continue to devote significant attention to potential valuation issues through both our offsite and onsite supervisory processes,2
1749,turning to the nonbanking sector it is essential that its prudential framework be adapted to reflect its increasing role in financial stability and in the real economy,2
1750,and in this respect some banks are considered to be riskier than others,2
1751,stress tests basically assess how banks would fare in various hypothetical scenarios involving different future paths for the economy and the financial markets,2
1752,at the end of the day stress tests may deal with hypothetical scenarios but their results can have very real consequences for the banks,2
1753,having large stocks of npls on their balance sheets prevents banks from doing their job,2
1754,getting rid of npls by restructuring working out or selling them requires a joint effort by banks politicians and supervisors,2
1755,the capital and borrowerbased macroprudential instruments i just mentioned are targeting risks among the banking sector and the real economy,2
1756,the first is the strengthening of banks balance sheets since the crisis with cet1 ratios for significant banks rising by 580 basis points above their 2008 levels,2
1757,drawing on guidelines from the eba we have developed comprehensive it risk selfassessments for the banks we supervise including an extensive section on it and cyber security,2
1758,the results of these assessments will feed into our supervisory review and evaluation process in which we will also challenge the information provided by banks,2
1759,this review will give us a better idea of the overall it risk landscape in the banking industry,2
1760,regulatory requirements for tpps and banks obviously differ but so does the spectrum of services that they provide and the level of risk that they encounter and need to protect against,2
1761,in the past we have seen banks become increasingly reluctant to participate voluntarily in benchmark panels mainly due to potential litigation and compliance risks as well as increasing contribution costs,2
1762,these factors may not be visible when looking at individual banks but they can threaten the stability of the entire system,2
1763,it requires banks to set aside more capital in upturns to make them more resilient,2
1764,once the downturn sets in banks can draw on the buffer which helps them absorb losses,2
1765,there is for instance the systemic risk buffer which can be applied to all banks or to specific groups of banks,2
1766,it aims to make banks more resilient to structural risks that affect the entire system,2
1767,regulating credit institutions finally we need to look at the banking sector whose profitability and stability might be impaired by vc activities,2
1768,this in turn might lead markets to question the reliability of riskbased capital requirements in general which would undermine trust in banks more generally,2
1769,the topdown output floor affects overall capital requirements depending on the overall portfolio composition of a bank,2
1770,we expect banks to manage some of their risks locally,2
1771,first we want to ensure that the models used by banks comply with regulatory standards,2
1772,there should be no unwarranted or undue heterogeneity in capital requirements for banks with similar risk profiles just because they are headquartered in different jurisdictions within the euro area,2
1773,so once we have finalised trim and once the banks have addressed all potential findings capital requirements will be calculated in a more consistent way across institutions,2
1774,the total capital ratio of significant banks has increased by more than 170 basis points since early 2015,2
1775,as you know a number of liquidity regulations affecting banks such as the net stable funding ratio nsfr and the liquidity coverage ratio lcr require banks to hold a sufficient quantity of highquality liquid assets,2
1776,and npls undermine trust  to what extent do markets trust a bank with a balance sheet that is considerably impacted by npls,2
1777,the magic of internal models to calculate risk weights in regulatory capital explains the difference although the low leverage ratio meant that a loss of 3 of total assets would wipe out banks capital,2
1778,the enhanced role of these institutions is nevertheless relevant as they may contribute to the increase of leverage in the whole financial system that cannot be measured by simply looking at banks balance sheets but has to consider synthetic leverage built with derivatives,2
1779,another principle is that we need a financial system with banklike institutions to provide deposit liquidity services and maturity transformation,2
1780,similar concerns subsequently led to the supervision of individual banks asset quality and liquidity position completing the microsupervisory instruments to ensure the robustness of individual institutions,2
1781,morris goldstein 201720 shows that the lr is more accurate in predicting bank failures than rwcrs since the latter have been affected by misuse of internal models by large banks,2
1782,the final aim should be to extend lr requirements to a broader set of financial institutions and to account for the risks posed by synthetic leverage from the use of derivatives as recently proposed by dirk schoenmaker,2
1783,it has also  as we hoped  had some success in reducing the importance of location in perceptions of bank risk because single rigorous supervision is an essential precondition for the other pillars of the banking union that more decisively sever the banksovereign nexus,2
1784,this would pose a financial stability risk to the extent that it hinders banks from building up capital through retained earnings and makes raising market equity too expensive,2
1785,the credit risk of banks is now less determined by the credit risk of their country of establishment,2
1786,too much remains on bank balance sheets at uncertain values by comparison with other continents where securitisation makes assets tradable thereby allowing the markets to clear banks balance sheets,2
1787,and the low growth environment fostered by such behaviour in turn sours more assets on the banks balance sheets,2
1788,some argue that the priority should be to strengthen private risksharing by completing the banking union and establishing a truly integrated capital markets union,2
1789,the irrelevance of a banks headquarters therefore depends on the institutional structure of the banking union,2
1790,while contagion from the recent events of bank resolution and liquidation remained contained these events have also highlighted the important challenges regarding the resolvability of weak banks,2
1791,indeed the discussion in europe is currently focusing on changes in several additional areas which will enable banks to apply simpler rules and thus reduce compliance costs for smaller banks  one proposal focuses on the capital requirement rules for market and counterparty credit risk,2
1792,similarly in the field of counterparty credit risk banks with small derivative portfolios might be able to use a simpler standardised approach to calculate capital requirements,2
1793,would it mean that these banks could hold less capital less liquidity,2
1794,but it does not mean that the rules should be generally less stringent or that banks can hold less capital or liquidity,2
1795,so we want quite a few banks to adapt more quickly to the new environment,2
1796,it ensures that banks acknowledge the risks they take and build up adequate buffers,2
1797,if we were to upset this balance it would become much harder to ensure that banks remain safe and sound,2
1798,as part of the srep we review the processes that banks use to assess and maintain adequate capital and liquidity buffers,2
1799,and we also need to consider how best to assess the risk management of banks in the srep,2
1800,we need to define fully fledged minimum expectations for the risk management of banks,2
1801,introduction systemic risks in the nonbank sector assessing the impact of a large shock on financial soundness of nonbank financial institutions stress testing can improve measurement of the risks and can help in the calibration of instruments mitigating those risks,2
1802,developed originally for assessing banking system resilience macroprudential stress tests have recently been extended to cover a wider range of nonbank financial institutions let me mention insurance companies conducted by eiopa ccps conducted by esma and asset managers,2
1803,first and foremost in order to conduct proper stress test analysis for the nonbank financial sector data availability needs to be significantly improved,2
1804,third as their business models and behaviour differ from traditional banks specificities of nonbank financial institutions have to be considered carefully when designing tools to stress them,2
1805,8 ecb 2013 a macro stress testing framework for assessing systemic risks in the banking sector ed,2
1806,and banks also need to be given adequate incentives in particular in relation to accounting for impaired assets,2
1807,this means that banks will have to recognise impairments earlier curtailing excessive forbearance towards npls and helping ensure that banking sector repair takes place in a timelier and more comprehensive manner in future downturns,2
1808,if banks can withstand a hypothetical adverse scenario they would likely be able to cope with the early recognition of expected credit losses under a real downturn as required by ifrs 9,2
1809,meanwhile the predominantly bankbased nature of the european financial system allows us the possibility of going back to a leaner balance sheet with lending to banks remaining the main channel for managing liquidity and steering shortterm interest rates,2
1810,the renewed focus on financial frictions clarified that this conclusion is unwarranted once it is recognised that financial intermediaries are subject to leverage constraints,2
1811,12 largescale asset purchases can ease these constraints and increase investors riskbearing capacity leading to a portfolio rebalancing towards risky assets and to strengthened lending activity for banks,2
1812,thus banks do not have to hold capital against them,2
1813,from a financial stability perspective one should also be mindful of the possible impact of revenue diversification on bank performance and riskiness,2
1814,in march we published guidance for banks on how to deal with npls and our supervisors are monitoring closely the strategies banks devise and the progress they make,2
1815,after all banks use these models to calculate risk weights for their assets which then serve as the starting point for determining the right amount of capital,2
1816,it will strengthen our ability to identify banks with structurally low profits and it will examine in depth how banks respond to weak profits  now and in the future,2
1817,the rules should be determined by how risky a bank is and by its relevance for the entire system,2
1818,in fact the predominantly bankbased nature of the european financial system allows us to consider the possibility of going back to a leaner balance sheet once the situation is normalised with lending to banks remaining the main channel for managing liquidity and steering shortterm interest rates,2
1819,yet the current environment also suggests that close monitoring is necessary in the following three areas the effect on risktaking in bank lending the impact on bank profitability and the impact on institutional investors,2
1820,in terms of the banking sector authorities have taken decisions to identify global and domestic systemically important financial institutions requiring them to hold additional capital buffers,2
1821,10  moreover there are few signs of banks in aggregate taking on excessive risk in their lending,2
1822,yet while banks risk perceptions have gone down since 2014 in line with general economic conditions and the overall pickup in the flow of bank credit risk tolerance remains restrained and has even tightened somewhat since 2015,2
1823,microprudential supervision can mitigate excessive risk taking by applying institutionspecific measures to the banks that invest the most in risky assets,2
1824,the resulting decline in banks roe relative to the precrisis years needs to be put into perspective and forms part of a transition towards a more sustainable new normal,2
1825,for example resilient banks are more likely to act as market makers for certain capital market instruments and may ideally buffer extreme price movements in times of crisis,2
1826,further progress on the banking union could also provide a rationale for recognising that crossborder lending activities within the banking union would benefit from a unified crosscountry supervisory setup and could therefore be treated like withincountry lending under the framework for global systemically important banks,2
1827,in this context the borderline between the banking system and capital markets may become important in particular when capital market participants or nonbank intermediaries fulfil typical bank functions,2
1828,the magic of internal models to calculate risk weights in regulatory capital explains the difference although the low leverage ratio meant that a mere loss of 2 in assets would wipe out the banks capital,2
1829,however as credit intermediation and liquidity creation extends to the nonbank sector it is important to expand our regulatory and policy efforts to the shadow banking sector,2
1830,it is also important to establish the legal basis for macroprudential tools that can be used to address risks to financial stability that emerge from outside the banking sector as well as to include a macroprudential perspective in the regulation of nonbank financial institutions across the eu,2
1831,this entails making banks equally liable across countries for the amount of risk they want to take into their respective balance sheet,2
1832,negative remuneration on banks excess reserves induces lenders and other investors holding cash reserves to diversify away from liquidity into longerdated assets,2
1833,not to revert to the old world of implicit government guarantees for risky behaviour of financial institutions entails making banks equally liable across countries for the amount of risk they want to take into their respective balance sheet,2
1834,for example a number of liquidity regulations affecting banks such as the net stable funding ratio nsfr and the liquidity coverage ratio lcr require banks to hold a sufficient quantity of highquality liquid assets,2
1835,this decrease into more negative territory meant that the negative deposit rate was now viewed as an instrument to empower the portfolio rebalancing channel of the app as it incentivised banks to invest the proceeds they received from selling assets in higher yielding assets,2
1836,moreover since financial institutions tend to engage in similar investment strategies both in upturns and downturns of the financial cycle over time common exposures to similar sets of risks can create financial imbalances or credit disruptions leading to procyclicality,2
1837,the result of our review many banks do not meet the global standards,2
1838,as usual we will therefore be very explicit on how these banks should improve,2
1839,many large banks use these models to calculate their riskweighted assets which then serve as a basis for calculating capital requirements,2
1840,trim will help to raise trust in how banks calculate their risks,2
1841,this is clearly a challenging situation for banks but so far its impact on profitability has been contained since monetary policy has countervailing effects on bank balance sheets,2
1842,first the end scenario for banks in terms of public risksharing is not yet clear not least for deposit guarantee schemes,2
1843,so banks are clearly in favour of risk sensitivity when it comes to determining the adequate level of capital,2
1844,and thats good smaller banks generally represent a smaller risk and therefore do not need to be as strongly regulated as large banks,2
1845,it is these teams that actually supervise the banks,2
1846,we have joined forces to make the banking sector safe and sound,2
1847,needless to say that i would certainly not accept banks booking all exposures with the euro area entity while having their risk management and internal control systems outside the euro area,2
1848,for those banks we directly supervise we will in any case keep a close eye on the risks that result from different group structures and from relations between different entities of the same group,2
1849,how to deal with the internal models that uk banks might want to use in their newly established eu entities,2
1850,i therefore urge these banks as well to prepare for the new future,2
1851,this approach makes for a safe and sound banking sector and should not change,2
1852,moreover low longerterm interest rates increase the market value of financial assets held by banks,2
1853,if financial markets were fully efficient one would assume that npls would be priced in a way that would result in fast market clearance and their removal from banks books,2
1854,furthermore investors may fear that banks cherrypick the best assets for themselves thus reducing the quality of portfolios offered on sale,2
1855,the resulting transfer of value from banks to the investor community would put further pressure on bank profitability instead of relieving it,2
1856,the leverage ratio which has been implemented in the united states for some time is a deliberately simplified way to assess banks riskiness,2
1857,the rise in importance of ccps is indicative of the generally increasing role played by nonbank financial institutions in recent years,2
1858,not to revert to the old world of implicit government guarantees for risky behaviour of financial institutions entails risk reduction in bank balance sheets through a more resilient lossabsorption capacity throughout the cycle,2
1859,this makes banks equally liable across countries for the amount of risk they want to take into their respective balance sheet,2
1860,this forms a sound basis for the supervisor to evaluate banks handling of npls and for banks to tackle this problem in a decisive way,2
1861,this would counteract important regulatory efforts to reduce excess volatility in the movement of funds between types of investment yet it is already easy to switch deposits from a bank hit by bad news to another commercial bank that is perceived as safe so i dont see an additional risk of bank runs in the event of an idiosyncratic banking event,2
1862,and second to deepen risksharing by creating the institutional conditions for more robust financial integration which has been one key aim of the banking union,2
1863,but if solvency is their chief concern banks will retrench rather than generate new or at least maintain existing business,2
1864,waiving liquidity requirements and large exposure limits could increase the interconnectedness within the banking group and lead to possible contagion effects4 in a banking union which has no common deposit insurance scheme and where the single resolution fund srf still lacks a fiscal backstop,2
1865,the welcome improvements in bank solvency  and the related improvement in asset quality  are a tangible result of our common work to create the banking union,2
1866,the comprehensive assessment we conducted in 2014  together with a deep asset quality review  encouraged banks to strengthen their balance sheets without delay,2
1867,critical in this context was the comprehensive assessment of bank balance sheets  including an asset quality review of great depth  which encouraged banks to frontload the strengthening of their balance sheet,2
1868,financial risksharing benefits and more broadly financial integration are deeply rooted in the soundness of institutions and policy rules,2
1869,lets first of all take a look at the banks ecb analyses show that our measures are having a positive impact overall on bank profitability,2
1870,and indeed the return on equity of large banks in the euro area is mostly still below the estimated cost of capital,2
1871,while it is not our role to tell banks how they should operate we must warn them against the temptation to prop up their profits by taking on too much risk,2
1872,another important issue in the context of risk management is the internal models that banks use to calculate their riskweighted assets which in turn serve as a basis for determining capital requirements,2
1873,through our review we will gain indepth knowledge of the internal models for credit and market risk used by european banks as well as of their standards and best practices,2
1874,we will also use the knowledge we acquire to hone our supervisory expectations and our guidance for banks regarding credit and market risks,2
1875,that guidance takes the form of recommendations to banks and defines a number of best practices that we have identified,2
1876,european banks have steadily increased their robustness and resilience since the financial crisis,2
1877,while this increase in the cost of equity may initially be compensated by the substitution of equity with debt funding the scope for such substitution is limited by regulatory requirements and banks own motives to establish adequate capital buffers,2
1878,and after many years of encouraging banks towards more plain vanilla business models it may be unfair to now expect them to reverse course,2
1879,this hinges on both supervisory pressure towards individual banks using qualitative and quantitative measures and on systemwide reforms to reduce the cost for banks and investors of getting npls off bank balance sheets,2
1880,though some banks have had cautionary experiences with crossborder expansions in the past the development of paneuropean banks alongside strong local banks serving local markets must be part of the financial landscape of monetary union,2
1881,the principle of proportionality is absolutely sound smaller banks generally represent a smaller risk and therefore do not need to be as strongly regulated or intensively supervised as large banks,2
1882,risks would be spread more widely making the banking sector more stable,2
1883,we see the whole picture  we can compare banks and their business activities and identify common problems,2
1884,in fact the enduring predominantly bankbased nature of the european financial system allows us to consider the possibility of going back once the situation is normalised to lending to banks as the main channel for managing liquidity and steering shortterm interest rates,2
1885,and such transaction demand for safe assets is also structurally increasing as financial intermediation shifts from the bank to the nonbank sector,2
1886,in particular nonbanks which also go by the unfortunate name of shadow banks are increasingly active in the traditional banking business,2
1887,this is a vital step to make resolution more effective while it should also go some way towards severing the link between banks and their sovereigns by shifting the financial burden onto the private sector or in the interim onto the union,2
1888,that means moving towards genuine risksharing over deposit guarantee schemes coupled with genuine risk reduction on banks balance sheets,2
1889,nevertheless restoring the capital position of greek banks represented only the first step of a more comprehensive reform plan to restore confidence in greek banks,2
1890,the draft guidance recommends that banks with a high level of npls establish a clear strategy aligned with their business plan and risk management framework to effectively manage and ultimately reduce their npl stock in a credible feasible and timely manner,2
1891,as nonbanks operate under less stringent regulatory constraints they might step into banks lending activities where bank balance sheets are already constrained,2
1892,this is testament to the fact that the negative remuneration of excess reserves discourages liquidity hoarding and reinforces the inducement for banks to rebalance their asset composition towards loans and securities with longer maturities confirming our expectations that investors move up the maturity and risk ladder,2
1893,in some cases banks that are among the largest institutions in their jurisdiction and therefore rely hugely on the benchmark to price their products have chosen to leave the panel,2
1894,and banks have substantially strengthened their capital positions in that time since 2012 the cet1 ratio for significant banks for instance has moved up from 9 to more than 13 today,2
1895,as financial intermediation continues to shift from banks to nonbanks we need to adapt our policy framework,2
1896,they could hardly assess their own risks let alone the risks of other banks,2
1897,such a framework would include sound financial regulation and macroprudential policy tools that limit excessive risktaking in the boom and make banks more resilient to losses in the bust for instance through higher and potentially countercyclical capital requirements leverage limits and stable funding ratios,2
1898,financial stability risks could also materialise outside of banks through excessively inflated financial asset prices and if zero or negative rates encourage asset price volatility,2
1899,the revenue structure of euro area banks was stable for a long time but it has recently begun to change and there is at least some evidence of banks tending to offer feebased products to clients as substitutes for interestbased products,2
1900,this comprises a vast array of financial services in which banks are also involved resulting from the expansion of securitisation of securities financing transactions sfts ie,2
1901,trying to contain leverage in the financial system by just putting more demands on banks will not address the system expanding outside the boundary,2
1902,while market scepticism regarding banks earnings outlook pushed down pricetobook ratios around the globe see chart 4 during the episode of heightened financial market volatility at the start of 2016 a continuing wedge between euro area and us banks may partly reflect the greater challenges euro area banks are facing in restoring profitability and adjusting to a postcrisis intermediation model,2
1903,aqr and stress test exercises are not about taking npls out of banks balance sheets but about ensuring that with a proper valuation there are enough provisions and capital to ensure the pointintime solvency of the institution,2
1904,stress tests are capital or solvency exercises conducted annually to check if the banks after incurring the losses associated with materialisation of an adverse scenario remain solvent with a capital ratio above the minimum requirements,2
1905,in conclusion stress tests analyse only the solvency of banks do it annually but do not test the profitability of banks going forward into horizons beyond a couple of years,2
1906,beyond aqr and stress test results the management and the supervisors of banks then have to discuss forwardlooking business plans as well as the necessary measures to maintain the banks sound and profitable which in the present conditions requires a reduction of npls,2
1907,however in the present situation we must count on the ingenuity effort and competence of the banks to change into more efficient institutions with lower costincome ratios and with the capacity to face fierce competition in a world of changing technology,2
1908,it would allow banks to contain their reporting burden and remain competitive at the global level,2
1909,first negative rates discourage  individually rational but economically costly  liquidity hoarding by banks,2
1910,meanwhile this easing has exerted important spillovers across asset classes and particularly important for a bankbased economy like the euro area our policy measures have compressed the levels and dispersion of bank lending rates across euro area countries as explained earlier,2
1911,at the same time while the favourable impact of our policies on banks intermediation activities and on credit quality should strengthen through time as the economic recovery firms the funding cost relief for banks will sooner or later run out of scope  and that will happen when banks entire liability structure will have repriced to the lower level of interest rates,2
1912,the comprehensive assessment helped us to identify problems on the balance sheets of the significant banks,2
1913,the merits of the new expected credit loss model will clearly depend on its proper and consistent implementation in the financial sector,2
1914,us banks have been critical of what will be a major change in frontloading provisions for credit risk,2
1915,additional factors that have boosted the demand for safe assets are the new liquidity regulation for banks and the increased need of safe and liquid assets to be posted in collateralised transactions,2
1916,indeed the portfolio rebalancing effect is empowered by the negative dfr as banks with high amounts of excess liquidity holdings have a strong incentive to reduce these holdings and put their reserves to work,2
1917,this is directly related with another effect which results from the banks having also the incentive to expand their portfolio of credit or to buy securities with longer maturities thus increasing revenues and reducing their amount of excess reserves,2
1918,i see three challenges or drivers of change in the banking sector that will ultimately influence the shape of the new normal,2
1919,deposit insurance and effective resolution tools it is important in the new normal not only to strengthen regulation and supervision but also to establish a framework in which it is possible for banks to fail without challenging the stability of the whole financial sector,2
1920,recent events including in the polish banking sector have reminded us of the importance of having an effective toolkit to deal with failing banks including at the early intervention stage,2
1921,going forward it will be essential for both investors and banks to have certainty on the overall level of capital requirements and the application of the new resolution framework,2
1922,in this respect we have to be mindful of banks concerns about compliance costs the complexity of the new framework and its cumulative impact,2
1923,unlike banks whose social function is to transform risk and maturity ccps are not in the business of taking risk directly but of pooling risk,2
1924,more generally we have not yet seen negative rates have a major impact on market makers themselves  in particular via the topical channel of banks and their profitability,2
1925,the concurrent tightening of bank leverage rules may also have restricted the ability of banks to engage in collateral transformation further exacerbating temporary collateral demand and supply imbalances in specific cases,2
1926,better regulated markets may mean that banks bear less risk but it does not mean they should not be strongly capitalised,2
1927,as this sector continues to expand and increase its role in lending to the real economy as its interlinkages with the wider financial sector deepen and as the footprint of large institutions grows nonbanks are clearly gaining in systemic importance,2
1928,let me elaborate on one principle macroprudential stress tests of the banking sector and their extension to nonbanks,2
1929,with respect to the banking sector the further development of capital markets increases competition and may incentivise banks to take on more risk to maintain profitability,2
1930,first the use of leverage within the banking system and the existing leverage ratio for banks may not always be a useful benchmark for all types of funds,2
1931,17  next to tools addressing excessive leverage we need to develop tools targeting liquidity in nonbank financial institutions,2
1932,as this may constrain banks lending capacity and their ability to build up further capital buffers determined action is needed,2
1933,in addition substitution effects induced by the tltros can result in a reduction in the supply of bank bonds which translates into lower yield on bank bonds for the financial sector as a whole,2
1934,the objective is to obtain a broader picture of the risk situation in the banking sector and to evaluate key market developments,2
1935,together the institutionspecific view and the horizontal analysis can provide us with a sound understanding of risks in the entire banking sector,2
1936,so for risk managers as well as for banking supervisors it is important to take a medium to longterm perspective anticipate potential problems and act when necessary,2
1937,and currently 21 of exposures retained by banks are covenantlite against 74 of those that they distribute,2
1938,most banks have limits in place with regard to exposures held on their own books,2
1939,fundamentally though banks have two options they either raise their earnings or lower their costs,2
1940,in order to realise scale effects banks could also centralise certain areas  such as reporting transaction settlement or some elements of risk management,2
1941,all this needs to be used by banks in the context of their risk management and must continuously be taken into account in their decisionmaking in order to ensure their success and survival,2
1942,the fall in bank equity prices was amplified by perceptions that banks may have to do more to adjust their business models to the lower growthlower interest rate environment and to the strengthened international regulatory framework that has been put in place since the crisis,2
1943,but when our priorities shifted towards the need to reengage banks in active credit intermediation those elements lost traction,2
1944,accordingly banks are now required to have larger and higher quality buffers,2
1945,if they are forced to adjust their business models banks could potentially move into riskier areas in search of yield,2
1946,that would increase not only the risk of bubbles in financial markets but also the level of risk within individual banks,2
1947,we will therefore be looking very closely to see whether banks are adjusting their business models what direction they are moving in and what risks that involves,2
1948,against the background of low interest rates cheap refinancing and low profitability it is increasingly important that banks manage risk in an appropriate manner,2
1949,funding substitution  before banks move on to the deployment of asset expansion strategies to offload the reserves received,2
1950,market participants were concerned that a state in financial difficulties might not have the resources to support the banks in its jurisdiction,2
1951,instead of seat belts and airbags we ask banks to hold sufficient capital to be able to absorb losses and protect banks passengers ie,2
1952,banking supervision in the 21st century combines both approaches to keep banks on track and out of harms way,2
1953,while i am indifferent to how structural changes affect individual financial institutions i have a strong interest in how they affect the financial  sector  and in particular in a bankbased economy like the euro area how they affect the ability of banks to finance the real economy,2
1954,the reforms that have been introduced so far have increased resilience and in extremis made banks less costly to resolve,2
1955,above all banks themselves need to face the challenge they need to reinvent themselves and reinvigorate their business models,2
1956,first of all banking supervisors have a central role in establishing a framework for the banking sector where an optimal market structure can emerge  which is to say where banks can reach their optimal size and level of geographic diversification without impediments creating by supervisory divergence,2
1957,the crisis has led to some rationalisation of the banking sector  on a nonconsolidated basis the number of credit institutions in the euro area has declined by 1160 17  between 200814  but this has also been accompanied by a renationalisation of their activities,2
1958,we can all agree that banks should be subject to consistent prudential requirements based on their business model risk profile and governance arrangements to only name the most important characteristics,2
1959,enhancements in the macro stress testing framework are underway to integrate more realistic dynamic features in the modelframework allow for banks reactions add a proper liquidity stress test component integrate contagion effects as well as a twoway interaction with the real economy,2
1960,developments pointed to more discrimination between banks notably regarding their valuation and risk assessment by the market reflecting the outcome of the tests,2
1961,the adverse scenario is designed on the basis of the main systemic risks to the banking sector identified as pertinent at a specific juncture,2
1962,the translation of the scenario into variables affecting the valuation of banks balancesheet elements has an endogenous dimension,2
1963,the main purpose of the exercise is to identify banks with a capital shortfall in relation to a predetermined hurdle rate,2
1964,following the ca ssm joint supervisory teams jsts followup with banks on their individual results dig deeper on potential pockets of risks and decide when necessary on additional bankspecific measures,2
1965,six bank holding companies with large trading operations were required to factor in a global market shock as part of their scenarios and eight bank holding companies with substantial trading or custodial operations were required to incorporate the assumption that their large counterparty defaults,2
1966,liquidity stress testing should be a tool to assess banks capacity to withstand extreme liquidity shocks by looking at banks liquidity positions,2
1967,as a starting point for a financial system stress test also involving firms themselves guided stress tests of nonbanking entities notably large asset management entities would be important even if not yet fully integrated with banking sector stress tests,2
1968,in addition estonia and the netherlands have already adopted systemic risk buffers to counter those risks emerging from groups of banks with similar business models,2
1969,another issue relates to the need to expand our macroprudential toolkit beyond the banking sector to also cover risks among nonbanks and the financial markets as a whole,2
1970,4 contrary to precrisis expectations the banking sector therefore never developed the institutional features to effectively share risk across borders,2
1971,investors and clients also have less confidence in the correct functioning of the banking sector and in the ability of supervisors and regulators to prevent excessive risktaking,2
1972,banks intermediation and trust let me start by using a simplification of the activities of banks to explain why it is worthwhile investing in regaining trust,2
1973,in the single supervisory mechanism ssm for example we are in the final stages of a thematic review of governance and risk appetite in the 123 institutions directly supervised by us which will feed into this years assessments of the capital and liquidity adequacy of banks,2
1974,it is also apparent that some banks are still in the early stages of implementing their risk appetite framework and therefore still have a lot of work to do to ensure its consistent application throughout the entire organisation,2
1975,all of these issues reduce the quality of decisionmaking and risk awareness within a bank and can obscure or even encourage malpractice,2
1976,the main effort to regain trust must come from bankers in particular from banks management and their boards as the tone from the top as well as the accountability of banks top management are key for risk culture and staffs behaviour,2
1977,the role of banks and their stakeholders in restoring trust so what must bankers do to rebuild trust,2
1978,on top of these foundations every bank needs clear risktaking policies allowing it to reach its business objectives while ensuring that risktaking activities beyond the institutions risk appetite can be identified and addressed in a timely manner,2
1979,by the middle of last year however it became clear that the measures we had adopted to provide a liquidity backstop for banks were becoming less effective in terms of their passthrough into credit conditions for the real economy as banks were actively deleveraging,2
1980,financial soundness indicators and coverage of risk transfer instruments including data on the credit default swap markets data measuring financial network connections particularly for systemically important global financial institutions and identifying the activities of nonbank financial institutions,2
1981,the impact of the expanded app on bank funding costs has been partially reversed by the recent market repricing,2
1982,in addition to the bankside capital based measures enhancing banks resilience borrowerbased instruments such as ltvs or dstis which have proved to be more effective in curtailing excessive credit growth and are also applicable in a timevarying fashion should gain more prominence,2
1983,guided stress tests can provide comparable assessments of the health of individual institutions and of the resilience of the financial system as a whole,2
1984,in this context a macroprudential framework focused solely on banks will be blind in one eye  it will have only a partial perspective on intermediation patterns and the forces driving the financial cycle,2
1985,since almost all large asset management companies in the euro area are owned by banks or bank holding companies reputational problems in the asset management arm could spill over to the parent company or vice versa,2
1986,if they experience substantial redemptions they may like banks be forced to promptly sell assets to fulfil their obligations which may give rise to fire sales,2
1987,regarding the asset management industry that is the main component of the shadow banking sector direct measures such as additional liquidity requirements guided stress tests minimum and timevarying load and redemption fees should be part of the macroprudential toolbox,2
1988,it compensates the lack of capital relief for banks in a regulatory environment which treats government bonds as risk free,2
1989,on the contrary this could have an impact on the business model of banks and insurance companies and impair their capacity to perform financial intermediation and support monetary policy transmission,2
1990,while recent regulatory efforts have made the banking sector more resilient i see a need to expand the set of macroprudential instruments that focus on the nonbank financial sector,2
1991,let me mention just a few elements by way of a reminder  considerably more and higherquality capital for banks  new standards for liquidity reserves and indebtedness in banks  considerably stricter risk management and governance requirements  the bank recovery and resolution directive brrd that marks significant progress in dealing with distressed institutions,2
1992,internal bank models are today seen by many to be a means for risky capital optimisation and not as a useful tool for bank management and riskbased supervision,2
1993,that is why the first thing that we developed in the ssm was a consistent supervisory approach with a consistent methodology for assessing banks risks and governance structures as well as their equity capital and liquidity positions,2
1994,we can also put work on banks internal models which have a significant influence on a banks capital requirements on a new footing,2
1995,within the newly created banking union the ssm has launched various initiatives to incentivise banks to reduce npes and to implement viable restructuring practices as well as to achieve consistency in provisioning and realistic collateral valuation in line with accounting rules,2
1996,tlac the leverage ratio and the review of risk weights would help underpin the effectiveness of capital regulation in avoiding excessive risktaking and protecting the real economy from the consequences of bank failure,2
1997,in any case the latest basel qis study shows that the large majority of banks already satisfy the currently envisaged 3 minimum requirement,2
1998,this would imply that in a situation where the lr becomes the binding measure for a subset of banks banks may potentially increase sme lending at the expense of other activities which have a preferential treatment in the riskbased framework relative to the lr framework,2
1999,we must address this variability of risksweights and banks overreliance on internal models that produce them,2
2000,when performed with proper regard to loan underwriting standards securitisation can play a very important role in diversifying bank funding sources freeing bank capital and allocating risk more efficiently within the eu financial system,2
2001,this essentially mirrors the macroprudential approach that we have followed for the banking sector,2
2002,this is in the spirit of what has been done for the banking sector where a range of policy tools is now available to address risks to banks from developments in specific markets and activities,2
2003,third specific treatment of banks exposures to ccps the bcbs has revised its previous basel ii capital framework which applied a zero capital charge to banks exposures to ccps in order to better capture the risks stemming from the financial systems increasing reliance on ccps,2
2004,the statutory tools implemented by banking supervisors for ensuring the resilience of banks may therefore not be appropriate for ccps and we should be cautious about any comparisons we make,2
2005,in my view an important step for the future will be to put together ccp stress testing and the stress testing carried out by big global banks one way of doing this could be to define common stress scenarios and see how the entire system performs,2
2006,authorities responsible for ccps and those responsible for banks should try and work towards a common understanding on procyclicality in order to ensure consistency in their regulatory actions,2
2007,additional measures may also be used to improve banks capital and liquidity position limit their large exposures or increase capital requirements for certain asset classes such as interbank and real estate exposures,2
2008,for a start the vast majority of banks have capital buffers above the thresholds implied by the srep decisions which in those cases means that an increase in capital requirements would actually have little or no effect on the banks credit supply,2
2009,capital should actually be a banks last line of defence and the supervisory approach we believe in implies that we are not engaged in a simple boxticking exercise whereby internal processes and conduct features can be ignored as long as a bank holds enough capital,2
2010,there is however no reason once the transmission channel is not impaired by banks poor balance sheets why this difference should impede the effectiveness of a broadbased asset purchase programme that works through a multitude of channels,2
2011,the aim of the regulatory agenda which is to make banks more resilient and reduce the burden of bank failure on society is also fully justified,2
2012,2 so banks themselves need to face the challenge they need to reinvent themselves and reinvigorate their business models,2
2013,securitisation is where banks and capital markets meet  a wellfunctioning assetbacked security abs market means more bank lending,2
2014,i will then focus on the growing importance of the shadow banking sector the specific risks that emerge from these unregulated activities and the challenges they pose to macroprudential policies,2
2015,success thus became the mother of failure  this sounds perhaps too harsh because good work has been done in adopting measures in the domains of capital liquidity and resolution of banks in order to increase the resilience of the banking sector within the financial system,2
2016,stress in the shadow banking sector can be transmitted to the banks both through direct and indirect channels banks exposures to shadow banks through equity investments credit claims or liquidity lines,2
2017,in fact the financial stability board is preparing a methodology for identifying global systemically important nonbank financial institutions gsinfis,2
2018,the extent to which those instruments can smooth the financial cycle crucially hinges on the importance of the banking sector relative to shadow banking in driving financial fluctuations notably credit and asset price developments,2
2019,a tightening of capital requirements can induce banks to exploit regulatory arbitrage opportunities and migrate some activities outside the regulated sphere resulting in a higher aggregate risk exposure of the financial sector,2
2020,and at present the two basel decisions namely on the equity investments of banks in nonbank financial institutions and on the limits to large credit exposures of banks still do not fully acknowledge the existence of shadow banking,2
2021,however any froth that may exist in some european asset markets is this time not fuelled by bank credit which continues to decline,2
2022,this will improve the reliability and coherence in banks calculation of riskweighted assets across the banking union,2
2023,the recent completion of a thorough asset quality review aqr jointly conducted with demanding stress tests induced the banks to frontload significant balance sheet enhancing measures build up confidence in the european banking sector and created a strong platform from which the banking union can confidently build on,2
2024,first we need to improve the quality and range of data to cover the whole financial system in order to have credible notion of the overall development of leverage and maturity transformation,2
2025,third macroprudential authorities should have the power to identify and require that systemically important nonbank financial institutions should be subject to more enhanced surveillance standards similar but not equal to the bank supervision regime as it is the case in the us fourth we would like to see countercyclical margin requirements for the extension of credit for trading in securities markets,2
2026,unlike banks protected depositors they can be assumed to understand and manage their risk exposures,2
2027,regulations passed so far have rightly aimed to make banks internalise systemic risks and markets to better price them,2
2028,moreover the effect of bank market power on financing constraints increases in financial systems that are more bank dependent,2
2029,the exercise comprised both the asset quality review which harmonised the valuation standards and accounting practices and the stress test which measured the resilience of banks to adverse macrofinancial shocks,2
2030,those banks which face a capital shortfall have undertaken remedial action and will reach the required capitalisation levels,2
2031,for example banks will have to further enhance their operational capacity to manage npls and to become more alert in identifying prospective npls,2
2032,it can do so by assisting banks ability to fund and distribute risk,2
2033,clearly the organisers at the safe policy center recognise that the provision of credit to the euro area real economy as well as some of the risks that this may entail also occurs beyond the regulatory perimeter of banks a topic which was discussed in depth at the 1st frankfurt conference on financial market policy organised last year,2
2034,however in its regular global shadow banking monitoring report the fsb focuses much more on entities that being nonbanks are involved in credit intermediation than on activities,2
2035,from the perspective of institutions the broadest measure of the euro area shadow banking sector akin to the broad measure proposed by the financial stability board fsb refers to the assets of money market funds mmfs and other financial intermediaries ofis that include all nonmonetary financial institutions apart from insurance corporations and pension funds,2
2036,several of these activities can be conducted by regulated banks or by nonspecifically regulated institutions,2
2037,nonbank banking risks to financial stability  let me now turn to the perspective of nonbank entities that perform credit intermediation andor maturity transformation,2
2038,similar to the traditional financial intermediation activities of banks shadow bank credit intermediation involves having credit exposures normally through purchased securities that are of a longer maturity and are less liquid than the short term and liquid nature of their liabilities,2
2039,the combination of potentially stretched valuations in some financial market segments and low liquidity in secondary markets could represent a systemic threat when combined with a high redemption risks for funds with significant duration mismatches low cash buffers and with direct contagion channels such as credit lines to the regular banks,2
2040,another perspective about the riskiness of nonbank banking relates not to categories of entities and their banklike structures and activities but to the very large footprint that some individual institutions have,2
2041,another aspect related with the boundary problem relates to the convenience of regulating the exposures of banks to nonbanks,2
2042,the basel committee has already defined the capital charges related to equity participations of banks in nonbank institutions,2
2043,however exposures of individual banks to shadow banks are subject to the general le limit,2
2044,in order to adequately monitor such risks and prevent them from materialising we need to have the data that allows for an adequate assessment of leverage in the overall financial system as well as of liquidity maturity mismatch and the interconnectedness between institutions both inside and outside the regulated perimeter,2
2045,such attractive conditions should increase the banks ability to make profits from new lending opportunities,2
2046,the exercise has already contributed to a further strengthening of the capital base of banks and for some of them further efforts will be needed once the results of the comprehensive assessment are known,2
2047,after all without having a detailed look at a large number of credit files it isnt possible to properly supervise most of the banks which are active in private and corporate banking,2
2048,we want to identify institutions that together represent a concentration risk for the financial system and could therefore be systemically relevant as a group in the event of a crisis,2
2049,the assessment of bank balance sheets aims to uncover bad debts and to place all banks with a solid capital base under the supervision of the ssm,2
2050,we will above all check whether the business models of banks we directly supervise are sustainable whether bankinternal control structures and governance are set up in an appropriate way and whether the institutions could survive crises,2
2051,the asset quality review has already given us a deeper insight into the banks procedures thereby making it possible for us to check which differences between banks are justified and to ascertain where we need to probe critically,2
2052,with great efforts on the part of the authorities and banks involved we have submitted the assessment of the bank portfolios to a unified assessment scheme,2
2053,the asset quality review has given us a deeper insight into the banks procedures thereby making it possible for us to check which differences between banks are justified and to ascertain where we need to probe critically,2
2054,finally some recent suggestions for regulatory reform propose separating activities that are currently implemented by commercial banks under one roof limiting the size of individual banks and at the same time increasing the relative importance of traditional financial intermediation activities,2
2055,i am and remain firmly convinced that in order to create a system of proper incentives for banks internal business and risk assessment strategies the capital requirements imposed on banks must be aligned strictly to the risk entailed in the business operations involved,2
2056,it is crucial to recognise that the financial cycle has an important endogenous component which arises because banks take too much solvency and liquidity risk,2
2057,2013 12 nguyen 2013 13 and benes kumhof and laxton 2013 14 contribute to a literature that motivates financial imbalances and excessive risktaking from overoptimism or from the implicit safety net guarantees for banks,2
2058,capital based instruments act to restrain the boom as long as banks overall cost of funds is sensitive to the structure of its liabilities,2
2059,high capital requirements are the first ex ante step to get banks to have skin in the game and to address moral hazard,2
2060,the question is then whether banks can and should operate with capital ratios even higher than those agreed in the basel iii accord,2
2061,from a historical perspective banks have long operated with more capital and with smaller implicit safety nets than today,2
2062,another aspect stems from the fact that capital requirements are imposed in terms of ratios to riskweighted assets which implies that banks have several possibilities to comply,2
2063,to identify such critical situations and intervene timely macroprudential authorities will need a sound system of risk monitoring across individual banks,2
2064,at the same time banks will be required to take corrective action regarding their own capitalisation levels if needed,2
2065,thus the effect of a downsizing banking sector might in fact be a blessing in disguise  that is a shift towards safer banks and a more balanced financing mix,2
2066,the business models risk attitudes and profitability of the banks need to be taken into account as well,2
2067,we estimate based on public information that since july last year banks have strengthened their balance sheets by an amount of 104 billion not only through capital increases but also collateral revaluations and higher provisions,2
2068,but i have to admit i expect banks with relevant capital shortfalls to have their solution ready before we publish the results,2
2069,it is clear that first and foremost banks will need to fill potential capital gaps via marketbased solutions,2
2070,as i said physical presence matters for banks in local markets especially given cultural differences in the euro area and this is also beneficial from a risksharing perspective as banks have equity in the game,2
2071,it is likely that the ongoing deleveraging of the banking sector will provide an impetus for capital market development in europe,2
2072,a third objective of the banking union is the contribution it can provide to financial integration by separating banks robustness from sovereigns and consequently reduce markets fragmentation,2
2073,besides these fundamental goals banking union also involves two practical aspects of more immediate concern that i will now address i the repairing of banks balance sheets to unclog the impaired credit channel and consolidate the ongoing mild economic recovery ii the reduction of the banksovereign loop in order to further mitigate the remaining financial fragmentation 6,2
2074,the ssm and the srm both components of the banking union thus contribute to reducing the negative feedback loop between banks and sovereigns,2
2075,the essential contribution that european supervision can give to the separation of banks and sovereigns is the buildup of trust in the robustness of banks as standalone entities so that enhanced confidence by their peers can help normalise interbank markets and overcome financial fragmentation,2
2076,for the rest of my remarks i will concentrate on two more practical and immediate goals of the banking union i to eliminate the banksovereign loop and thereby reduce financial fragmentation ii to repair banks balance sheets unclog the impaired credit channel and consolidate the ongoing mild economic recovery,2
2077,both components of the banking union the ssm and the srm contribute to reducing the negative feedback loop between banks and sovereigns,2
2078,for example by imposing common principles about methods and parameters that improve the reliability of banks internal models it will address the problems created by differences in the way that banks calculate riskweighted assets,2
2079,some economists are of the view that negative developments in bank credit in the euro area are predominantly due to credit supply restrictions  namely insufficient capital to absorb supposedly still unrecognised losses,2
2080,this should also reinforce the consolidation dynamics i just mentioned it is natural for the establishment of the ssm and the comprehensive assessment of banks balancesheets to a period of general marketdriven restructuring in the european banking sector,2
2081,one reason is that the new regulatory environment gives banks incentives to hold marketable liquid securities such as corporate bonds or assetbacked securities as opposed to corporate loans,2
2082,the ecb has gone to great lengths to support the bank lending channel and we are now conducting an asset quality review coupled with stress tests to ensure that banks complete the process of repairing their balance sheets,2
2083,its aim is to dispel doubts about asset quality and levels of capital and provisions and in doing so to accelerate the process of deleveraging and restructuring in the banking sector that is the inevitable consequence of a major financial crisis,2
2084,first the proposed regulation on indices used as benchmarks in financial instruments and financial contracts needs urgently to be adopted and implemented as regulatory uncertainty has been one of the factors leading to banks leaving the euribor panel,2
2085,so we have a situation where certain banks own assets with risks and capital charges that they do not wish to bear,2
2086,this link between sovereign and bank risk reflected first and foremost the perception that the ultimate guarantor of deposits in the banking system is the state,2
2087,to illustrate its scale the total amount of riskweighted assets rwa being reviewed amounts to 37 trillion or just below 60 of total rwa for the 128 participating banks,2
2088,and indeed we have seen in many cases that banks have revised asset valuations raised equity and disposed of assets,2
2089,for banks that are found to be healthy by the assessment the price mechanism will no longer be obscured by uncertainty about asset valuation and bank funding models,2
2090,there will no longer be a need for such banks to rebuild capital and hence their incentive to reduce loans that carry higher risk weights like those to nonfinancial corporations will disappear,2
2091,by identifying weaker and stronger banks and putting a price on bank assets the comprehensive assessment may also have a further effect the results could present an opportunity for a revival of ma activity which has been very weak since the crisis with the overall value of deals decreasing fourfold from 2008 to 2012,2
2092,it is of course for banks to decide whether such integration makes business sense,2
2093,this is why our ongoing comprehensive assessment of banks is so important,2
2094,many banks are already making preparations so they have to take fewer corrective measures after the assessment,2
2095,unified supervision should create greater trust among banks thus reducing the risk aversion related to crossborder lending,2
2096,capital needs related to idiosyncratic risks may still need to be met at the subsidiary level but our approach is likely to leave some flexibility to the joint supervisory teams that oversee each significant bank to tailor the approach to the relevant banks business model and statutory arrangements,2
2097,that said there are also frictions that create obstacles to closer bank market integration,2
2098,overall i expect the future of banking to involve some rebalancing away from such high levels of bankbased intermediation and towards more capital marketbased intermediation,2
2099,i expect that this ratio will continue to fall and converge towards 100 as banks seek to further consolidate their balance sheets and develop safer more sustainable business models,2
2100,that is to take collective responsibility for our banks consistent with the single financial market in which they operate,2
2101,investors should have the facts they need to properly price assets and be assured that banks are sufficiently capitalised,2
2102,the asset quality review has three specific goals first to achieve transparency about the current quality of balancesheets second to repair balance sheets where necessary and third as a as a result of the first two to regain the confidence of all major stakeholders in banks,2
2103,essentially it is a case of ensuring that there are no unknown risks hiding in banks balance sheets  for example as a result of inappropriate classification or valuation of assets,2
2104,that will give us an overview of whether the banks have a viable business model and where the biggest risks lie,2
2105,first many banks are unwilling to acquire parts of other banks abroad,2
2106,the first priority is to support the bank lending channel by strengthening banks  that is by cleaning up their balance sheets and reducing fragmentation in funding markets,2
2107,this causes banks to preserve capital and avoid risky new exposures such as those to smes,2
2108,by shedding greater light into the euro area banking sector this review will help remove the uncertainty about asset valuation and funding models,2
2109,in several countries this will lead to stricter loss recognition for smaller banks than at present  and so accelerate the process of balance sheet repair even for the banks we do not directly supervise,2
2110,there is little doubt that these regulations would strongly impact the future decisions of banks and insurers to invest in securitised products,2
2111,second an asset quality review aqr to enhance the transparency of bank exposures by reviewing the quality of banks assets including the adequacy of asset and collateral valuation and related provisions,2
2112,in the banking sector the us has genuinely nationwide banks which allows them to better diversify risk,2
2113,investors seem to be uncertain whether banks have proper asset valuations and are adequately provisioned,2
2114,indeed since last year banks have been improving the robustness of their balance sheets by increasing capital and provisions in anticipation of our comprehensive assessment,2
2115,in this sense the exercise is already producing results  and it indicates the willingness of banks to resolve existing problems within the sector itself,2
2116,the three elements combined will ensure a comprehensive assessment identifying remaining risks on banks balance sheets,2
2117,if that is not the case if the risk premium paid by a bank client in one country is not idiosyncratic but systemic then there no longer truly is a single market for capital,2
2118,many sources of financial impairment have a structural nature having to do with lack of convergence across economies exposure of banks to sovereign credit risk and viceversa and regulatory and supervisory ring fencing,2
2119,9 as a consequence the liquidity buffers chosen by banks could be insufficient,2
2120,thus the nsfr requires banks to fund illiquid assets with a minimum amount of stable liabilities over a horizon of one year,2
2121,the question is how much is too much to the point where it would allow banks to sustain flawed business models,2
2122,a more farreaching question which i did not address in this speech is whether the increased risksensitivity of bank liabilities under the new regulatory regime will constrain the role of banks as providers of liquidity services to the economy or as creators of quasimoney,2
2123,together they will allow a comprehensive view of banks balance sheets bringing together quantitative and qualitative aspects of banks outstanding risk,2
2124,5  in order to prevent banks from circumventing the bailin rules the directive also defines minimum requirements for own funds and eligible liabilities mrel ensuring that banks have sufficient lossabsorbing capacity ie,2
2125,the requirements are currently based on the size risk characteristics and the corresponding business model of banks,2
2126,this could increase overall funding costs as it would require banks to adapt their liability structure such that more costly debt plays a greater role,2
2127,on top of this banks that already meet the minimum bailinable debt requirement may adjust their liability structure to incorporate a larger fraction of deposits,2
2128,as another example as there is at least in theory a risk that bailin rules could trigger financial contagion if a significant proportion of banks liabilities are held by other banks or by systemically important nonbanks such as insurance companies 8 we need to understand and if necessary limit such crossexposures,2
2129,bank debtholders have to be able to monitor banks  market monitoring but by monitoring them and pricing risk correctly they are also effectively influencing banks behaviour  market influence,2
2130,a somewhat related issue is that banks may have a perverse incentive to increase the risk of its assets returns in order to transfer value from contingent capital investors to the original bank shareholders g pennacchi 2011 a structural model of contingent capital federal reserve bank of cleveland working paper no,2
2131,but of course raghurams previous work was also quite well known  particularly his research on the theory of banking on bank capital or liquidity risk and on liquidity creation by banks with the unavoidable financial fragility that this implies 2,2
2132,banking union is ultimately a way of establishing a single financial market where banks are separated from their sovereigns,2
2133,as a consequence of this threepronged exercise some banks might face capital gaps to close,2
2134,the significant improvement in the funding situation of banks since the summer of 2012 has not yet fed through into higher credit provision,2
2135,in particular the systemic risk concentration in a small number of global financial institutions is further increased and an increasing number of foreign jurisdictions are exposed to risks arising from the potential default of those banks,2
2136,the asset quality review of banks to be carried out before the ssm becomes operational will ensure that hot potatoes will not be handed over to the ssm,2
2137,this reflects the opinion of investors that banks overestimate the value of their assets will not deliver the expected rate of return or will require fresh capital,2
2138,we can only secure longterm  and above all sustainable investor confidence  if we as the banking supervisor may in future also decide that a bank is no longer viable,2
2139,channel 2 increasing confidence in banks balance sheets turning to the second channel where i see that banking union can help support the single market investor confidence has been damaged by the perception that some supervisors have not been tough enough with their domestic banks,2
2140,the average pricetobook ratio of large and complex banking groups in the euro area for instance is currently only 05 which implies that investors think banks are overvaluing their assets will not meet their required rates of return or will require new capital,2
2141,the fact that improved bank fundamentals have not been translated into higher pricetobook ratios tells us that there is a confidence problem as regards euro area banks,2
2142,a credible lenderoflastresort function can ensure that no solvent financial institution ever faces a bank run,2
2143,i would argue that providing secured financing with a threeyear maturity in our vltros at the end of 2011 and at the beginning of 2012 was a successful example of systemwide liquidity insurance for banks,2
2144,investors remain unsure about the health of banks balance sheets about the rigour of their supervision and about the capacity of fiscallyconstrained countries to resolve banks that are no longer viable,2
2145,transparency on asset valuation is necessary to subsequently assess the capital position of banks and also to facilitate market transactions on bank assets,2
2146,however building the ssms credibility requires more than just transparency on banks asset quality,2
2147,markets also need to be confident that in the future the supervisor can pull the trigger on banks that are failing or likely to fail,2
2148,since banks carry out maturity transformation by borrowing short and lending long and there are limits to their ability to hedge against interest rate risk the result could well be an abrupt unwinding of risktaking positions putting financial markets under renewed stress,2
2149,at the current very low rates these institutions may try to withdraw the funds from the accounts with their custodian bank thereby reducing the supply of funds and potentially increasing banks funding costs,2
2150,it covers not only work achieved within the basel iii framework to improve the resilience of systemically important banks to shocks to their capital and liquidity but also ongoing work related to financial market infrastructures and the regulation of shadow banking,2
2151,indeed while omts have eliminated one dimension of financial fragmentation the risk of euro breakup they only have a muted and indirect effect on the other source of fragmentation  the adverse feedback loop between sovereigns and banks,2
2152,our ltros gave banks sufficient reassurance that access to liquidity will not be a problem over a relevant planning horizon,2
2153,on the supply side european banks and financial markets did not perform according to theory in managing credit risk,2
2154,facing losses on several of their assets banks were forced to rebalance their portfolios in order to meet regulatory capital standards,2
2155,first one has to recognise the change in the liability structure of banks that is brought about by the deleveraging of the system,2
2156,second came a surgical separation and removal of assets of dubious quality for those banks which had detected capital shortfalls and proved most vulnerable to future shocks,2
2157,investors began shifting deposits away from banks in stressed jurisdictions often to banks in countries where conditions were calmer,2
2158,another rationale for the srm as a separate entity is that a supervisor cannot give objective verdicts on the viability of banks if then these banks can only be closed in a disorderly way,2
2159,a single resolution mechanism srm is essential to break the link between banks and their respective sovereigns and to ensure that nonviable banks can be wound down in an orderly manner,2
2160,the two key facts about this financial structure are that it is bankbased rather than capital marketbased and that there are multiple benchmark interest rates rather than a single rate universally acknowledged as risk free,2
2161,questions arise like do we know enough about the true quality of banks balance sheets and are the banks capable to absorb potential further losses,2
2162,there were cases when banks were not induced to develop sufficient capital and loss buffers in good times,2
2163,the establishment of a banking union would help to break this negative feedback loop between sovereigns and banks,2
2164,i will refer to these developments when discussing the effects that the banking union should have on more and better financial integration,2
2165,conversely they may encourage the domestic subsidiaries of foreign banks not to send funds to their parent banks located in countries with highrisk premia,2
2166,a final point to note about the ssm according to its regulation is that its launch will be associated with a comprehensive review of participating banks balance sheets,2
2167,the early repayment by banks of the liquidity received from the first threeyear ltros has given initial mild indications for improvements in banks funding conditions and the overall health of the banking sector,2
2168,the repricing of risks escalated it spread from banks to the sovereigns and back to the banks reflecting an adverse feedbackloop between banks and their respective home country,2
2169,the regaining of confidence in the banking sector is key to reverse recent developments towards financial fragmentation and help restart a wellfunctioning interbank market,2
2170,this element whatever its terms will be of great important for the achievement of one goal of the banking union project namely to mitigate the negative feedback loop between banks and sovereigns,2
2171,news about a failing bank can be automatically wrongly perceived as a result of deficient supervision cancelling out reputation built over a stream of years with no news about problem banks,2
2172,such financial due diligence would furthermore inform about provisioning and loss mitigation policies and broadly validate banks reporting,2
2173,deep and liquid money markets insure banks against liquidity risk a risk that arises naturally in banking where maturity mismatch is the nature of the business,2
2174,the rise and fall of the euriborois spread of the use of the ecbs deposit facility and the proportion of crossborder transactions all indicate that banks are more riskaverse than they were before the financial crisis,2
2175,the latest bank lending survey suggests that the announcement of the omts seems to have mitigated the adverse impact of sovereign risk on banks funding substantially by enabling a number of banks to regain market access particularly in distressed countries,2
2176,it limits regulatory forbearance a form of insurance and serves as an incentive for sound risk management in the banking sector,2
2177,and as banks had already shed parts of their external and other noncore assets in the first wave less room was left for banks to protect domestic credit,2
2178,for our financial stability review and in our work for the esrb we are already using one of this models to assess the secondround impact of banks crossexposures to complement the topdown stress tests that we regularly conduct on a sample of 90 eu banks,2
2179,the financial crisis looks as much like a sudden breakdown in financial intermediation which then spilled over to and exacerbated sovereign debt tensions as a crisis sparked by risky corporate leverage or banks being less efficient in monitoring investment projects,2
2180,alternatively if banks prefer to keep a certain portfolio of assets they have to make an adjustment on the liability side,2
2181,the mix of actions on the asset and liability side that banks may choose to take is not necessarily optimal from a welfare point of view,2
2182,they significantly helped in restoring confidence in financial markets by providing insurance on the ability for banks to rely on ecb liquidity,2
2183,risks of contagion from one institution to entire financial sectors greatly complicate any effort to establish a more symmetric risk and rewardstructure for banks,2
2184,the board has put forward proposals on how to reinforce banks capital without putting their fundamental role in the real economy at risk on how to reduce the risk of moral hazard for systemically important financial institutions those that are too big to fail on how to increase transparency in financial markets in particular in derivatives,2
2185,6 importantly the emergence of banks benefits not the banks themselves which usually charge a higher rate on their lending than they pay on their issuance of ious but also society as a whole the free negotiability of the banks liquid liability expands the market participants trading opportunities,2
2186,it has revealed a significant reduction in banks capital gap,2
2187,it has chosen to accept a broad range of asset types as collateral in its credit operations reflecting i the large number of and differences among its eligible counterparties ii the heterogeneity of financial markets in europe in particular in the early times of emu and iii the differences in business models of european banks,2
2188,the divergence in bank funding conditions is certainly a key factor in addition to the countryspecific economic situation in explaining the differences in bank lending rates to nonfinancial corporations across euro area countries,2
2189,this risk has not materialised as the list of eligible collateral has been expanded to enable banks to take full advantage of the ecb fullallotment policy while rigorously applying risk control measures to mitigate liquidity market and credit risk,2
2190,at the same time banks have started to reverse the diversification of their portfolio across borders in recent years especially in detriment of stressed countries,2
2191,this is essential from a supervisory and financial stability perspective as well as to preserve the levelplaying field among banks,2
2192,resolution is for institutions that have reached the point of nonviability and includes the sale or merger of the institution or the creation of a bad  good bank with or without a bridge bank or finally the orderly liquation of what is really nonviable,2
2193,the second point is in a sense a collective action problem because national supervisors looking at the crisis have asked their banks the banks under their supervision to withdraw their activities within national boundaries,2
2194,for instance the financial market union would help break the link between banks and their sovereigns and stop deposit flight,2
2195,18  the adverse feedback loop between banks and sovereigns in which doubts about the solvency of the sovereigns feed doubts about the solvency of the banks and vice versa will be broken more readily by the establishment of a true banking union,2
2196,these new institutions would mitigate counterparty risk and promote a truly integrated approach to banking supervision,2
2197,a popular means of assessing the systemic importance of a financial institution is to look at the sensitivity of its value at risk var  ie,2
2198,especially the modelling of bank defaults within a general equilibrium framework is crucial to allow for a proper characterisation of financial instability,2
2199,18 a second indicator in this class of measures focuses specifically on systemic stress within the banking sector  examining the onset of systemic stress through the lens of joint probabilities of default on the basis of cds pricing of financial institutions,2
2200,one of the major tools to perform financial stability assessments is stress testing primarily of the banking sector but also conducted for the insurance sector  including sensitivity and scenario analyses,2
2201,stress testing tools allow for evaluating the impact on banking sector solvency of severe but plausible macrofinancial scenarios that reflect key systemic risks,2
2202,on this basis we use our topdown stress test tools to rank the impact of prevalent macrofinancial risks in order to gauge the resilience of the banking sector,2
2203,additionally it stressed that financial stability may be negatively impacted by fair value accounting due to the interconnectedness of financial institutions markets and the broader economy,2
2204,this liquidity constitutes a precautionary supply for sight liabilities that the banks have towards households nonfinancial corporations and other banks,2
2205,similarly the threeyear ltros are helping banks to implement the necessary deleveraging in an orderly fashion by reducing funding risks and avoiding fire sales of banks assets,2
2206,the term shadow banking is widely used to cover activities related to credit intermediation liquidity and maturity transformation taking place outside the regulated banking system,2
2207,in addition not only banks but also insurance companies pension funds and ideally the entire financial system including the shadow banking sector should be covered in order to effectively help policymakers identify potential sources of systemic risk,2
2208,uncertainty about the level of banks asset encumbrance is also hampering market participants capacity to assess banks creditworthiness thereby reducing the availability and increasing the costs of unsecured funding,2
2209,all in all there is now strong preliminary evidence that the threeyear ltros have helped the banks to reduce liquidity risk and therefore allowed them to smooth the deleveraging process over a longer period of time and maintain exposures to smes  at least in some cases,2
2210,moreover in the face of asset market fragmentation such asset price misalignments are more likely to build up in countries where banks have ample liquidity positions,2
2211,following the signs of improvement in the financial environment it is therefore essential for banks to strengthen their resilience further even by retaining earnings,2
2212,the argument goes that banks are simply taking cheap liquidity and setting up carry trades or putting the liquidity back into our deposit facility,2
2213,the consistent application of such a definition would make it easier to compare eligible capital instruments from bank to bank within the eu thereby strengthening the confidence of market participants in the lossabsorbing capacity of banks capital and more generally in the resilience of the eus financial sector,2
2214,in addition the new basel iii rules are being implemented to secure adequate capitalization of banks,2
2215,banks limit their lending to other banks and potentially to the broader economy and they hold on to precautionary balances of cash as selfinsurance,2
2216,the propensity for banks to take risks can increase in a competitive market where they are trying to maintainincrease market share,2
2217,if the goal is to reduce banks exposure to asset price cycles then counter cyclical capital buffers are useful as well as tools of a more microprudential nature,2
2218,the objective of countercyclical buffers is to ensure banks build up capital buffers in good times so that capital is available to absorb increased losses in downturns,2
2219,the basel iii framework represents a minimum standard and therefore authorities can introduce more stringent prudential rules to address specific risks in their domestic banking systems for example higher risk weights for certain exposure classes,2
2220,the second is the requirement for banks to buildup buffers above the required minimum particularly when the economy is booming thereby providing for additional cushions to absorb losses in periods of financial distress,2
2221,the third element is directed to enhance the risk coverage of the regulatory framework providing a more comprehensive treatment of banks exposures to complex financial products whose risk to the system has been neglected so far,2
2222,the intended improvements in the liquidity position of banks aim at containing the excessive reliance on shortterm funding and give incentives to hold safe and liquid assets,2
2223,and third the new liquidity requirements will ensure that the banking sector has enough highquality liquid assets to withstand acute funding stress as well as guarantee that longerterm assets are funded by more stable medium or longerterm sources,2
2224,basel iii is a very important step in the right direction as it should provide for higher minimum capital requirements and better risk provisions by financial institutions,2
2225,first experience has shown that penalising banks and even letting them fail is not necessarily the best way to make the financial markets work better and assess risk appropriately,2
2226,this means that markets  not only supervisors  have to be convinced that banks can withstand a worsening of the situation both in terms of access to liquidity and in terms of absorbing potential losses through capital,2
2227,incentives for banks to monitor each other may also be lost and this could result in further market inefficiencies,2
2228,for this we have at our disposal a number of tools and techniques which help to assess and quantify the impact of systemic risks on the banking sector and ultimately on the real economy,2
2229,for instance the topdown stress test uses common methodologies and assumptions across all banks whereas the bottomup approach allows for some heterogeneity across banks with respect to certain assumptions and applications such as the use of banks own internal credit risk models,2
2230,the topdown assessment can therefore be employed to capture outlier results of individual banks in the bottomup stress test,2
2231,the identified sources of systemic risks facing the eu banking sector need to be translated into specific shocks that drive macro and financial variables,2
2232,hence our fourth building block which is still the least developed concerns the modelling of contagion from banks failing the stress test to other banks via various forms of counterparty exposure and more broadly also to other economic sectors using a flowoffundsbased propagation tool,2
2233,the introduction of more stringent capital requirements may provide incentives for banks to shift part of their activities outside the regulatory realm,2
2234,these elements should substantially improve banks capital position and loss absorbing capacity thus enhancing the resilience of the financial sector,2
2235,it is of the essence that we all adhere to the agreed timeline ensuring that our banks have a strong capital base,2
2236,shadow banking the introduction of more stringent capital requirements for credit institutions under basel iii as well as the requirements for global systemically important banks may provide incentives for banks to shift part of their activities outside the regulatory perimeter,2
2237,in addition i will examine how the regulations introduced by the bank of spain during the boom years helped to prevent and mitigate the negative effects of the crisis and especially how some of the reforms and structural changes that are currently being considered may substantially reduce the fragilities of the banking sector,2
2238,11  second looking into the future with the crisis behind us higher bank capital requirements will also play a positive role by reducing incentives for excessive bank risktaking,2
2239,such models including topdown stress test of individual institutions allow risks to be assessed more broadly and at a higher frequency than is possible with bottomup exercises run by financial institutions thus enhancing the real time information on systemic risk available to policymakers,2
2240,at this point we have drawn up a set of more stringent banking regulations providing capital to absorb more losses improving coverage and reducing the risk of excessive borrowing,2
2241,one example is the prudential measures which during the 1980s permitted us banks to book brady bonds at their nominal value,2
2242,in addition it proved necessary to increase the overall level and lossabsorbing capacity of the capital held by banks,2
2243,the new liquidity buffers will ensure in the short term that banks hold sufficient high quality liquid assets to withstand an acute stress,2
2244,in addition it is important that the proposals on the leverage ratio and liquidity risk framework are rigorously calibrated so that any unintended consequences for individual banks the banking sector and financial markets can be timely addressed,2
2245,the purpose of these requirements is threefold first to increase sifis resilience to adverse shocks second to internalise the costs of distress they impose on the financial system and third to restore proper incentives with respect to their risktaking,2
2246,moreover the crisis has undermined the sustainability of some business models that were rather widespread among large international banks while also exposing the shortcomings of corporate governance and of the evaluation and management of the different sources of risk within financial institutions,2
2247,some of the its main elements that can be sketched out based on previous experiences of systemic banking crises are as follows   somewhat higher macroeconomic volatility and lower potential growth   protracted periods of adjustment in housing markets and in the construction sector   more rigorous scrutiny of valuation of property as collateral for credit also using making use of independent valuation sources   an upward shift in the pricing of credit and liquidity risk    stricter regulation in order to strengthen the resilience of the financial sector though probably at the cost of making financial intermediation somewhat more expensive    evolving role of central banks stronger inclination towards leaning against the wind policies and the assignment of macroprudential objectives    changes in the macroeconomic environment regulatory and supervisory framework as well as industry structure may have very significant implications in the way the financial sector operates in the future,2
2248,however some large universal banks especially those with significant investments in other financial institutions and in insurance companies often across borders will face new challenges mainly resulting from the new definition of capital and from the introduction of the leverage ratio,2
2249,it is important to emphasise in this context that several policy initiatives have been launched recently to address the specific risks associated with systemically important financial institutions sifis,2
2250,at the same time in the short to mediumterm it will be inevitable to improve the cost efficiency of banks as well as to make changes in the ownership structure and in the business activities of certain institutional models while also restructuring some segments of the national banking sectors,2
2251,at the same time banks have reviewed the geographical location of their assets,2
2252,risk management  apart from the regulatory initiatives the banks internal risk management represents a first line of defence against increasing risks,2
2253,furthermore research has shown that the impact on risktaking of low shortterm interest rates is amplified when securitization activity is high  for it improves banks capital and liquidity position and reduces borrowers risk  and when banking supervision standards are weak,2
2254,it is unclear whether this separation reduces the overall amount of risk in the financial sector or simply shifts it to institutions that are not deemed systemic,2
2255,that banks business models and corporate governance become more sustainable internalizing the costs of their risk taking and potential failure   that financial market activities become more transparent with respect to financial innovations practices and risk assessments   and that the soundness of the system as a whole has to be ensured,2
2256,the introduction of more stringent capital requirements for credit institutions may provide further incentives for banks to shift part of their activities outside the regulatory perimeter,2
2257,we have achieved a blueprint of more stringent bank regulations that includes more lossabsorbing capital better risk coverage and limitations for undue leverage,2
2258,regardless of why asset price bubbles arise there is little doubt that they pose potential risks for financial stability especially when they involve bankprovided debt finance,2
2259,the experiences since 2007 crisis have taught us that ensuring the stability of individual banks is not enough for the stability of the system as a whole,2
2260,in this context it is important that appropriate backstops be in place for those banks which do not pass the test,2
2261,2011 who estimated the costs and benefits of higher bank capital,2
2262,they estimate the average cost of capital for banks to increase by a relatively minor 1040 basis points when the bank capital doubles,2
2263,as i already mentioned enhanced stability of financial institutions should in principle be reflected in lower risk premiums and thus lower funding costs for banks,2
2264,indeed basel iii will have some potential transitional costs that arise as banks on average need to increase their capital base in order to fulfil the new requirements,2
2265,the benefits of higher capital and its calibration as i have highlighted better capitalised banks may represent substantial benefits from a social perspective in the long run while the transition costs depend largely on the amount of additional capital that banks have to accumulate and the available time for banks to adjust to the new framework,2
2266,regulators and supervisors should reflect on the new types of activities that banks engage in the future as well as on the new types of risks associated with these activities,2
2267,we as risk managers have the weighty responsibility of ensuring that our institutions are prepared to weather these financial storms,2
2268,the risk control framework needs to include explicit checks and controls to ensure that the actual risk profile of the firm stays line in with the risk tolerance of the financial institution,2
2269,having said this there is still room in our financial system for specialised banks which have the expertise required to take particular risks onto their balance sheet,2
2270,the crisis has exposed this and has revealed significant shortcomings in the risk control frameworks of financial institutions,2
2271,however a levy on banks should be seen as a complementary tool in the set of instruments aiming at increasing the loss absorbency of systematically important banks  notably capital and liquidity surcharges and contingent capital,2
2272,in the absence of asset liquidity and with many of the main actors in financial markets undergoing painful processes of lossrecognition consolidation and deleveraging some of the assumptions of the models regularly used for risk management did not hold anymore,2
2273,as a result uncertainty about the true fair value of the assets being held by financial institutions increased significantly,2
2274,risk management apart from the regulatory initiatives the banks internal risk management represents a first line of defence against increasing risks,2
2275,however if it lasts for extended periods it may delay the necessary adjustments that should be implemented by the banks themselves particularly by reducing their financial leverage and strengthening their capital,2
2276,because of the crucial role of banks in the real economy we decided to provide liquidity in unlimited volumes and with longer maturities to banks,2
2277,the riskbased approach applied by individual banks may not be sufficient to achieve the level of security that is required at the aggregate industry level,2
2278,on their own they will further draw up guidelines and recommendations for individual financial institutions to take account of the systemic risk they pose,2
2279,the aim of such buffers is to make banks build up capital when systemwide risk is increasing following excessive credit growth,2
2280,in the presence of very considerable intrafinancial sector leverage even relatively modest increases in policy rates can lead to significant changes in credit conditions and market dynamics to the extent that they alter financial institutions risk tolerance,2
2281,treating aggregated risk as endogenous clearly differs from the risk analysis approach carried out from a microprudential perspective or by financial institutions individually where aggregate risk stemming from other financial institutions actions and the overall environment is perceived as exogenous,2
2282,besides this type of bottomup stresstests  which are based on the work conducted by individual financial institutions according to the guidance by authorities on stress scenarios  we need to also conduct topdown macro stresstests conducted by the authorities on the basis of all the available information,2
2283,this reflects not only the structural features of financial institutions  namely which institutions are heavily exposed to each other and under which conditions such exposures can impair their viability with ripple effects through the system  but also the interrelationships among the risk factors at the starting point of the analysis,2
2284,furthermore macro stresstesting models being the workhorse of systemic risk assessment tend to provide an evaluation of the severity of the risks that is confined to the banking or financial sectors,2
2285,it will also allow combining accountingbased information on the banking and financial sectors at large with firms risk management views and their perception of the main risks further down the road,2
2286,this could enable financial institutions to improve their forwardlooking capacity in decisionmaking resulting in them taking corrective measures with sufficient lead time and being more resilient to market tensions should they arise,2
2287,in particular it is important to assess the extent to which parent banks may have contributed indirectly to financial stability risks via lending in foreign currency,2
2288,overall i am confident that stricter conditions for what should count as regulatory capital will contribute to restoring confidence in the ability of banks to weather future periods of stress,2
2289,in particular they need to focus much more strongly on new riskbased instruments and the exposure of banks and other financial institutions outside the banking sector to certain asset classes and geographical areas,2
2290,indeed macroprudential analysis assesses the collective behaviour of financial institutions and the way in which it may pose risks to the overall system,2
2291,the riskbased approach adopted by individual banks may be suboptimal,2
2292,the transition arrangements will allow banks to meet the new standards while not endangering the progressive consolidation of the recovery,2
2293,first it is essential that tools are developed which increase the shockabsorbing capacity of systemically important financial institutions and lower their contribution to systemic risk,2
2294,the crisis revealed that even sophisticated investors and banks supposed experts in assessing financial risks too often took the shortcut of outsourcing their riskassessments to credit rating agencies,2
2295,the events have spurred thinking on banks risk management practices on the incentives for excessive risktaking and on the reasons for the failure of regulation and supervision of the financial sector to prevent such events,2
2296,moreover it implies that changes in market conditions such as a downgrade can move assets from one category into the other leading to sudden changes in banks fulfilment of the liquidity coverage ratio,2
2297,and also because it does not consider that the higher degree of banks safety brought about by the new regulation implies that premia required by investors to fund banks may undergo a generalised decline,2
2298,as regards the costs it has been found that a 25 increase in banks holding of liquid assets over total banks assets would lead to a loss in gdp of about 01 per year,2
2299,let me provide two examples of how the new measures aim at preventing banks from simply transferring their risk to the unregulated sectors,2
2300,as discussed before the liquidity coverage ratio is supposed to induce banks to hold more liquid assets,2
2301,one way for banks to boost their ratio is to keep their most liquid assets on their balance sheets and to pledge the more illiquid ones as collateral in ecb liquiditysupply operations,2
2302,this implies that banks may try to circumvent the spirit if not the letter of the new regulation by shifting more of their risky assets to the eurosystem,2
2303,we could say that this type of policies intends to protect the banks from the cycle and to shelter the cycle from the banks behaviour,2
2304,in my view the major lessons from the current crisis for any future regulatory policy are the following  first basel ii rested on the principle that the purpose of regulation is to ensure the safety and soundness of individual financial institutions against the risk of loss on their assets,2
2305,therefore banks need to devote greater attention to their risk management,2
2306,one way for regulators and private markets to be able to monitor financial institutions and to assess their systemic reach is to assess the risk of multiple defaults,2
2307,but we do need to include the roles of large and complex insurance corporations or highly leveraged financial players and their interactions with banks in our overall judgements about relevant systemwide interactions,2
2308,in this environment banks and other investors engaged in a search for yield spurring financial innovation,2
2309,furthermore in an attempt to strengthen their capital bases in the view of adverse market conditions and potential losses banks became more riskaverse and sold off risky assets amplifying the initial shock,2
2310,finally a broad collateral framework may distort the incentives for banks to manage liquidity risk properly by allowing them to replace highly liquid assets such as government bonds with illiquid assets,2
2311,currently envisaged changes in the regulation of banks aim at making banks better internalise the cost of their risktaking and impose heavier capital charges on their riskier positions,2
2312,regulation should attempt to limit the risks that banks assume by imposing higher countercyclical capital requirements thus limiting leverage,2
2313,these operations aimed to stem significant tensions in the fxswap market which had made it very difficult for banks outside the us to refinance their large net holdings of usdollar denominated assets,2
2314,8  in addition by offering unlimited funding for a broad maturity spectrum to a large number of banks we have helped to avoid that banks be forced to sell assets at firesale prices or at illsuited moments,2
2315,the resulting rise in risk premia can be passed through to the funding costs of banks and more broadly of the private sector especially if doubt is cast over the ability of the public sector to counter adverse disturbances to nonfinancial and financial sectors,2
2316,the implementation of the financial support measures have averted the collapse of fundamentally sound banks,2
2317,it is crucial to address these weaknesses and to set the financial sector on sounder foundations that allow it to withstand the inevitable shocks that will occur in the future,2
2318,capital requirements should i be higher for larger banks ii depend on the liquidity of the assets held by a bank and iii increase in proportion to a banks shortterm debt,2
2319,in particular banks will be required to hold sufficient highquality liquid assets to withstand episodes of financial stress as well as to shift towards more stable sources of funds on the liability side,2
2320,second the investors required rate of return on banks equity and other sources of funding such as longterm bonds can be expected to decline reflecting a lower risk for share and bondholders resulting from the enhanced resilience and safety of banks hence decreasing the cost to banks,2
2321,to this end 15 financial institutions should have in place independent risk management functions with sufficient authority to lean on the decisionmaking process,2
2322,furthermore regulators and supervisors have to be alert to the fact that financial innovation by adding layers of leverage complexity and opacity can transform the risk profile of even traditionally safe assets,2
2323,i would like to focus on the consequence of this namely that the core of financial intermediation has moved from depository institutions  commercial banks  to a hybrid aggregate of institutions and functions which is broadly referred to as the shadow banking system,2
2324,in this segment of the financial system lenders have large  and lumpy  financial resources to place with intermediaries for short periods of time with no protection from formal deposit insurance mechanisms,2
2325,it was a byproduct of securitisation because in order to finance the large increase in their securitisation business the banking system had to draw on a larger pool of financial resources than retail deposits could offer,2
2326,overall through its enhanced credit support measures the ecb has replaced illfunctioning segments of the financial market and acted as an intermediary between banks with a liquidity deficit and banks with a liquidity surplus,2
2327,swift completion of the process of calibration and implementation of these necessary reforms should remove related uncertainties and allow banks to optimise their capital planning and where necessary adjust their business models,2
2328,general principles in the management of credit risk  it is widely accepted but not appropriately emphasised that one of the causes of the deep financial crisis witnessed since mid 2007 has been the deviation from well established principles in the management of risk in particular credit risk by financial institutions,2
2329,at a time when all risk measures probabilities of default of collateral issuers and counterparties correlations expected loss varmeasures have gone up dramatically and financial institutions are cutting credit lines and are increasing margin requirements in the interbank market the central bank becomes the lender of last resort,2
2330,furthermore enhancing the liquidity risk management of banks could have a positive impact on market confidence reducing thus the volatility in money and capital markets,2
2331,although initially a liquidity squeeze concerns about counterparty credit risks quickly spread as uncertainties intensified about the nature and extent of exposures of banks to what we now call toxic assets,2
2332,financial institutions are able to hedge another type of risk  liquidity risk,2
2333,i am convinced that if banks neglect their primary activity of due diligence and if they come to abuse risk control techniques liquidity creation and arbitrage opportunities finance will do more harm than good to the economy,2
2334,the ultimate investors in securitised loans could in principle have exercised the due diligence that banks were no longer providing,2
2335,implementing these measures will lead the return to a more sustainable longerterm business model for banks,2
2336,for this reason the aggregate amount of risk in the financial system can prove excessive and owing to interdependencies larger than the sum of the perceived risks by individual financial institutions,2
2337,it aims at detecting and assessing systemic risk by examining how aggregate risk is distributed across financial institutions and markets and how it evolves over time,2
2338,the analytical tools that can be used to identify and assess systemic risks and to issue early risk warnings include i financial stability indicators to point to fragilities related inter alia to broadbased increases in leverage or to financial institutions rising common exposures to asset classes ii early warning models to indicate when the financial system or a particular market approaches a danger zone iii macro stresstesting models to assess the resilience of the banking system to extreme but plausible events and iv contagion models to help identify the extent to which financial sectors are interconnected,2
2339,when the value of those assets starts falling a fire sale can be ignited as each bank attempts to guard against further reductions in value but no bank is on the other side of the market,2
2340,15  since banks play a central role in the intermediation of credit in the euro area we have largely directed our efforts at banks rather than intervening to influence activity and spreads in specific financial markets,2
2341,the timely exit from these measures was and is appropriate so as to avoid market distortions that could result from maintaining such measures longer than necessary and to provide incentives for banks to restructure and strengthen their balance sheets,2
2342,in trying to reduce the probability of bank holdings engaging in speculative activities some proposals have even gone as far as banning proprietary trading by banks the socalled volcker rule,2
2343,in particular they protect depositors both by preventing bank managers from embarking on risky projects by making sure that banks have a sufficient equity at stake and by allowing regulators to close and recapitalise banks before equity value falls to zero and debt holders start making losses,2
2344,comparisons between countries have shown that bank systems are capable of performing their intermediation role with very different levels of capital,2
2345,these actions are aimed at commercial banks as well as at nontraditional financial players to make sure that excessive risktaking is not taking place outside the auspices of regulators,2
2346,after the demise of lehman liquidity hoarding was so intense that we feared bank intermediation would suffer a complete and lasting collapse,2
2347,as i speak the funding ability of banks appears no longer to be a restraining factor for bank lending,2
2348,the quality and quantity of bank capital and their liquidity buffers have to be improved in good times to provide a sufficient buffer for bank equity to withstand the inevitable increase in credit risk when the cycle turns,2
2349,recent experience suggests that the monetary policy stance may affect the confidence  and thus the risktaking behaviour  of financial institutions in particular of banks,2
2350,because financial intermediaries  whether banks brokerdealers shadow banks or hedge funds  finance themselves with shortterm liabilities central bank decisions on the level of shortterm rate affect their marginal price of leverage,2
2351,making sure that banks are wellcapitalised is the foremost life jacket of our system,2
2352,the initiatives undertaken at the global and european level should address the transparency and risktaking behaviour of financial institutions and thus be consistent with general principles such as i correct risktaking incentives and avoid moral hazard ii minimise distortion in the banking sector iii ensure a global levelplaying field,2
2353,fifth a harmonised treatment for liquidity risk will be introduced requiring banks to hold sufficient highquality liquid assets to withstand episodes of financial stress,2
2354,it is interesting to note that among the factors that affect banks restrictive intentions neither the one concerning the liquidity position of the banks themselves nor the one concerning access to financial markets seems significant any longer,2
2355,the alarm that seems to be widespread in the banking sector concerning the new rules seems to mask the intention of adapting to them via a reduced exposure to the real economy rather than via a capital increase,2
2356,finally a global minimum liquidity risk standard for internationally active banks will be put in place requiring banks to hold sufficient highquality liquid assets to withstand financial stress,2
2357,this has left them increasingly vulnerable to a renewed weakening of their currencies which could trigger a significant further deterioration in banks asset quality,2
2358,the recovery in major banks earnings the slowdown in the growth rate of both riskweighted and total assets and increases in capital have contributed to a slight increase in the regulatory capital ratios of the median institutions,2
2359,this should enable financial institutions to improve their forwardlooking capacity in decisionmaking taking corrective measures with sufficient lead time and being more resilient to market tensions if and when they arise,2
2360,with a view to enabling better measurement of key elements in systemic risk analysis it is the responsibility of financial institutions to continue to enhance the transparency and granularity of their individual reporting,2
2361,there are a number of features of financial systems that make them particularly prone to these forms of systemic risk,2
2362,what have we learned from this experience in terms of identifying those structural trends in financial systems that are important for systemic risk,2
2363,systemic risk is distinct from the risk that can affect the safety and soundness of individual financial institutions,2
2364,the crisis has illustrated that systemic risk may be triggered by the collective behaviour of institutions and the manner in which they interact in financial markets,2
2365,one important issue in assessing systemic risks is to measure the degree of procyclicality which is embedded in the financial system itself namely the capacity of the system to amplify fluctuations and to produce after a certain period of time excessive booms and busts starting from relatively modest initial shocks up or down,2
2366,the quality and quantity of bank capital and their liquidity buffers have to be improved in good times to provide a sufficient buffer for bank equity when the cycle turns,2
2367,moreover it could take the wind out of the sails of providers who make use of banks infrastructures but are not subject to the same strict security requirements,2
2368,how will the introduction of countercyclical capital buffers and more emphasis overall on risk management frameworks affect the behaviour of banks and the real economy,2
2369,some of the euro amounts on the liability side take the form of reserve requirements so that banks are actually obliged to hold them,2
2370,it may also slow down necessary structural adjustments to the balance sheets of banks and ultimately to the business models of some financial institutions,2
2371,regulatory capital requirements are central to our discussion as there are clear links between banks capital management the loangranting process and credit supply,2
2372,countries also adopted measures to shield institutions from losses on their assets by ringfencing offering state guarantees and by swapping and transferring socalled toxic assets from banks balance sheets,2
2373,however for some time the elevated levels of interbank money market spreads and banks cds spreads as well as the depressed level of bank stock prices reflected sustained pessimistic investor sentiment towards the banking sector,2
2374,in terms of the prudential framework the capital base of banks needs to be strengthened and rules must be introduced to ensure that they are sufficiently capitalised and remain liquid at all times,2
2375,in the future banks should hold higher levels of capital  of higher quality  and more liquid assets,2
2376,it also gives banks a chance to overhaul their risk management practices and verify that the procedures they adopt take full account of the complexities of the financial markets,2
2377,in general it appears that oldfashioned banks following the traditional banking model characterised by an originateandhold strategy and funding via deposits seem to have weathered the financial storm better than banks that relied on the originatetodistribute model,2
2378,without going further into details it is obvious there are important questions to be answered about the optimal business models for banking by supervisors but also by the banks themselves,2
2379,the measures we have implemented have been concentrated on banks,2
2380,on behalf of the governing council i have therefore stressed continuously that banks should take appropriate measures to strengthen their capital bases,2
2381,in the financial market compensation schemes for bank loan managers weakened their incentive to conduct a prudent screening of loans,2
2382,the quality and quantity of bank capital and banks liquidity buffers have to be improved in good times to provide a sufficient buffer for bank equity to withstand the inevitable increase in credit risk when the cycle turns,2
2383,a key element of the risk management framework of banks is that they take into account in terms of credit and liquidity risks the exposure they have to particular potentially systemically relevant counterparties,2
2384,finally a harmonised treatment for liquidity risk is also upcoming requiring banks to hold sufficient highquality liquid assets to withstand financial stress,2
2385,systemic risks can emerge even when financial institutions manage their risks in a way that looks appropriate from their individual perspective,2
2386,in fact weaknesses in the socalled originatetodistribute model followed by most large banks and fragilities in the funding of special investment vehicles and conduits resulted in some of those risks backfiring and ending up consolidated on the banks balance sheets,2
2387,but my speech today is going to focus on excessive risktaking and banks creation of innovative financial products which has led to the transformation of their business models,2
2388,4 in my view the concerns that prompted the act were very similar to those currently being voiced  particularly in relation to concerns about banks business models and the sale of unsound securities to unsuspecting investors,2
2389,i should now like to focus on two major factors that have changed the way banks do business,2
2390,one consequence of this deregulation has been a global trend towards more diversification in banks income sources ie,2
2391,this mispricing of risk relates to deficiencies in risk management techniques but also and perhaps more importantly to existing incentives in the banking system oriented towards the short term profitability of banks,2
2392,how banks have fared during the recent financial crisis    the recent financial crisis has illustrated how banks own business models and incentives can have a major impact on financial stability,2
2393,it is very important to develop a proper framework for the macroprudential supervision not just of banks but also other financial institutions markets and instruments that can be systemic in nature irrespective of whether they are regulated or not,2
2394,with a view to strengthening the resilience of the banking sector the regulatory reform agenda that has been launched and agreed internationally will     introduce a leverage ratio as a measure to curb banks excessive balance sheet growth,2
2395,overall there seems to be no simple answer on banks best practises and their business model,2
2396,our predominantly bankbased system of financial intermediation in the euro area made it natural to concentrate efforts on easing the strains in the banking sector via the provision of liquidity and adapting our collateral requirements in our refinancing operations and to target an instrument as is the case for covered bonds that plays a significant role in securing longerterm funding for the banking sector,2
2397,many banks have moved from the buyandhold model to the originateanddistribute model whereby they distribute credit risks they originated to other market participants,2
2398,one of the central lessons of the past two years is that  despite the appearance of netting positions falling outside the banking sector  credit risk has not been effectively transferred outside of the financial sector with a number of contractual arrangements preventing a true separation of credit risks from the lending institutions,2
2399,under these conditions it would be crucial to reassess the sources of funding constraints for banks,2
2400,in any case for large banks the capital should increase more than they increase in size,2
2401,moreover  especially in a bankbased financial system such as that of the euro area  many borrowers decisions are influenced by bank lending rates rather than market rates,2
2402,the nonstandard measures we have chosen are therefore directed mainly at banks,2
2403,in any case the postcrisis financial system is likely to be more riskaverse less leveraged less complex and also less profitable at least on the basis of shortterm measures of profitability,2
2404,these prospects weighed on investor confidence in the resilience of alreadyweakened financial institutions,2
2405,over the medium to longer term banks should undertake the appropriate restructuring to strengthen their financial soundness and resilience to shocks,2
2406,first the systemic importance of cds markets comes from the high degree of interconnectivity between cds markets and credit and cash securities markets the embedded financial leverage of cds and the significant level of cds exposures in relation to the total assets and capital cushions of the banks involved,2
2407,in the current crisis uncertainty over the size and location of exposures of banks or banksponsored conduits to toxic assets translated into funding liquidity problems,2
2408,even when assessing the credit risk of financial institutions in their own jurisdiction for instance their regular counterparties in open market operations central banks do not have access to any privileged information available to banking supervisory authorities  or if they do they are prevented from using it through the establishment of chinese walls,2
2409,moreover a number of asset relief schemes involving the removal of impaired assets from banks balance sheets on the provision of guarantees to limit the valuation losses of such assets are in different stages of implementation,2
2410,in times of market stress there will be a natural tendency for banks to use a greater amount of assets of a lower quality,2
2411,at the same time rapid financial innovation and the emergence of new nonstandardised structural products made the risk assessment difficult for rating agencies leading to considerable underpricing of the embedded unit of risk and to biased expectations about the evolution of asset wealth,2
2412,the same is true for the number of banks participating in these operations,2
2413,the aim is to remove the uncertainty surrounding the valuation of certain securitised assets on banks balance sheets,2
2414,in the present circumstances i wish to underline that banks should not be requested to hold more capital than is required by the existing capital framework,2
2415,past experience and the assessment of alternative schemes on the basis of a number of criteria suggest that there is no single approach that would be uniformly superior independently of the circumstances of the financial institutions concerned,2
2416,in concrete terms macroprudential supervision should involve financial stability monitoring and analysis the development of early warning indictors macrostress testing to verify the resilience of the system the definition of reporting and disclosure requirements to ensure the availability of relevant information as well as macroprudential regulation aimed at countering the potential procyclicality of regulatory requirements and avoiding excessive leverage risk concentration and liquidity mismatch in the financial system,2
2417,the pressure to deliver quick profits makes it more difficult for risk management departments that are often viewed as party spoilers to curb excessive risk taking in their financial institutions,2
2418,the basel i framework that was prevalent at the time of the turmoils outbreak and still is underestimated banks exposures by not capturing the bulk of the risks related to offbalancesheet vehicles as well as liquidity and reputational risks,2
2419,overall banks must ultimately respond to losses on risky assets by raising new capital,2
2420,those banks may be forced to adjust their positions by selling assets themselves thus leading to further asset price declines,2
2421,in this regard while it is clear that the financial market turmoil must necessarily imply an adjustment in banks risk management it seems to me that the current very conservative behaviour of individual banks characterised by a strong reduction in credit lines and little appetite to actually assess and price credit risk even at the very shortest segments of the money market is not in the longterm interest of the banking system,2
2422,in this respect many large global banks have consistently applied the disclosure methodology set out in the fsf report to their holdings of complex and illiquid instruments thus demonstrating the willingness of the private sector to contribute to strengthening market confidence,2
2423,furthermore guidance has been provided by the basel committee on banking supervision on assessing banks fair value practices for financial instruments,2
2424,a strong increase of the spread in summer 2007 and in september 2008 reflects the reluctance of banks to lend to each other closely related to a general lack of transparency about the risks individual banks have been carrying on their books,2
2425,and the profitability of financial institutions might face further downside risks in the months and quarters ahead,2
2426,moreover there was increasing concern that  as the experience of bear stearns had shown  the range of systemically relevant institutions had become broader so that not only large traditional banks but also nondepository financial institutions such as investment banks and primary dealers played a systemic role in maintaining market liquidity in a broad range of unsecured and secured markets,2
2427,information should be available concerning institutions instruments and markets that are currently unregulated but whose risktaking behaviour gives rise to financial stability concerns given their potential systemic impact,2
2428,when the turmoil set in many financial institutions realised that their risk management systems were not as reliable and robust as they had believed them to be and indeed should have been,2
2429,measures could include requiring banks to hold additional capital and liquidity buffers and introducing dynamic provisioning systems that require banks to build up a general reserve that can be drawn on in downturns,2
2430,while this was largely due to the actions of individual banks aimed at reducing risks in their balance sheets it also reflected to a certain degree the impact of the implementation of basel ii,2
2431,there are in particular five areas of concern that should be addressed to strengthen the institutional framework for the financial sector      risk management of banks both bank management and supervisors will have to play a more active role in scrutinising risk management practices internal checks and balances clear lines of responsibilities etc,2
2432,the funding conditions of banks    since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity,2
2433,overall i believe that the actions taken by central banks and national governments provide an exceptional response to address the challenges stemming from the recent significant deterioration in market confidence and provide a new environment aiming at reactivating the intermediation role of banks,2
2434,at the same time success ultimately depends on the banking sector making appropriate and prudent use of these measures and contributing to restoring normal market conditions,2
2435,a reallocation of funds between banks may be necessary because of the rise of unexpected or expected liquidity needs of banks or simply because banks are heterogeneous and specialise in different activities,2
2436,such behaviour might be justified from the point of view of individual banks which after having taken too many risks in the past have now become more prudent even excessively prudent,2
2437,first the financial distress clearly originated from shortcomings related to financial institutions the overall functioning of the market and especially excessive risk taking therefore policy discussion has focused on addressing these issues,2
2438,there is evidence that financial innovation has led to a stronger and faster passthrough from changes in policy rates to banks interest rates in particular for banks which are very active in securitisation and derivatives markets,2
2439,in this respect true sale securitisation in which the underlying credit is removed from the originating banks balance sheet has provided banks with a formidable instrument to conserve on bank capital and reserves and to expand the asset side of their balance sheet through leverage,2
2440,however in situations in which the securitisation market grinds to a halt such as is currently observed the effectiveness of the bank lending channel may reassert itself,2
2441,2 indeed even though income diversification tends to increase profits and that strong and profitable banks are better able to absorb losses and thus strengthen financial stability this strategy at the same time can increase financial stability risks as the increasing reliance on noninterest income sources entails a higher exposure of banks to the major global risks and in particular those related to capital markets,2
2442,as mentioned before the financial turmoil has also illustrated possible implications of banks changing business model for financial stability,2
2443,in order to restart bank lending and restore confidence in money and credit markets some countries have announced that guarantees will cover also new liabilities issued by banks,2
2444,the ecb is monitoring developments in this area and i believe that providing clear guidance on this issue is pivotal to improving the confidence in and the comparability of banks financial statements,2
2445,a key explanation for this behaviour lies in banks risk management systems which did not appropriately price risks resulting in the creation of capital and liquidity buffers that in many cases proved insufficient to insulate them from the dislocation in the financial markets,2
2446,furthermore liquidity risk did not receive enough attention in banks overall risk management,2
2447,i fully endorse the work done by the basel committee to review banks risk management practices as well as the guidance on sound liquidity risk management and supervision which was recently published and constitutes a benchmark for the practices of financial institutions,2
2448,having said that i would like to stress that financial institutions are ultimately responsible for ensuring that all relevant risks including liquidity risk are properly integrated into their overall risk management,2
2449,although the way in which financial institutions manage their risk is regarded by many as the main determinant of procyclicality other elements such as capital requirements accounting standards or banks compensation schemes can act as contributing factors,2
2450,first the root of the problems for many financial institutions affected by the market distress was their inability to adequately assess the risks associated with the exposures they held either directly in their books or indirectly via offbalance sheet entities,2
2451,this is the basis for exploring their possible impacts on banks behaviour and the business cycle,2
2452,the new risk control measures which do not change the general characteristics of the framework and are not expected to impair the ability of banks to participate in our operations were communicated by the ecb on 4 september and will enter into force on 1 february 2009,2
2453,from a financial stability perspective they have a number of attractive features not least the fact that the credit risk stays with the originator which strengthens the incentives for prudent risk management generally they are also more transparently accounted for in banks published accounts than securitisation transactions,2
2454,in the light of the experience it is fair to say that liquidity risk has been neglected in banks overall risk management compared to all the attention that over the past years has gone to capital management,2
2455,the events of the past year have been a strong reminder that liquidity risk is a key risk for banks to manage and which even profitable and solvent institutions cannot afford to downplay,2
2456,this is also an area where in the first instance it is for the financial institutions themselves to pursue improvements in their liquidity risk management systems,2
2457,a number of banks indicated that in response to the financial market correction they intend to place more emphasis on such facilities,2
2458,in the literature on traditional banking crises the focus has been on the systemic implications of a deposit run,2
2459,however even before the outbreak of the current financial market turmoil some commentators have argued that while securitisation certainly spreads existing risks it may in fact encourage the creation of further risks particularly by relaxing the incentives for banks to screen and monitor borrowers in order to alleviate the informational asymmetries associated with credit contracts,2
2460,based on a set of quantitative indicators we review the state of financial integration in the money bond equity and banking markets in our annual report on financial integration in europe,2
2461,although there was a slight increase in the standard deviation of unsecured rates during the financial market correction the fact that collateralised rates have not reacted in a similar way suggests that the reason lies in an increased variability of credit risk among banks rather than in growing crossborder market segmentation,2
2462,the experience gained from the financial market correction has indicated that the liquidity risk management of a number of financial institutions was not commensurate with their increasing exposure to liquidity risk from both the assets and liabilities side,2
2463,however the financial stability outlook remains highly uncertain and depends among other things on the following three factors first how conditions in the us housing market develop second how banks respond to a much more challenging operating environment and third the extent to which initiatives and measures aimed at restoring confidence and strengthening financial system resilience are eventually implemented,2
2464,for example supervisory information on banks securitisation activities can help to improve the analysis of credit developments by avoiding the bias that would be incurred by not including assets transferred from the banks balance sheets,2
2465,3 the stickiness of bank rates hinges among other things on financial structures and competition within the banking sector as well as on competition from marketbased sources including securitisation,2
2466,the size of banks balance sheets has increased because banks have had to retain assets initially intended for securitisation or sale and because they have had to transfer the underlying assets from their offbalance sheet vehicles back into their balance sheets,2
2467,in a way banks try to protect themselves against the dangers of increased adverse selection ie,2
2468,it shows that the role of credit risk seems to have diminished while the contribution of other factors increased after midmarch as liquidity concerns in money markets rose following the collapse of bear stearns which induced banks to hoard more liquidity,2
2469,up to now banks have responded to the market turmoil and the resulting exceptionally challenging operating environment by retrenching from risktaking,2
2470,the current financial stability outlook is highly uncertain and will depend inter alia mainly on the following three factors first how conditions in the us housing market develop second how banks respond to a much more challenging operating environment and third the extent to which initiatives and measures aimed at restoring confidence and strengthening financial system resilience are eventually implemented,2
2471,3 box 5 of the fsr examines the role of the macroeconomic environment as a potential source of risk for financial stability by looking at past banking crises in an attempt to identify a common set of fault lines during periods of financial distress,2
2472,as clearly described in the cpss report they need to adopt a holistic approach to risk management in particular as banks have increasingly relied on wholesale and secured funding,2
2473,in a recent ecb survey banks have reported minimum annual savings of 53 million in liquidity and collateral management alone from t2s,2
2474,the various amplifiers that characterise modern financial systems which contributed to driving leverage up  the most notable being associated with the originatetodistribute model of finance  also magnified the uncertainty about the extent of the imminent downturn driving a massive run on riskier assets,2
2475,certain aspects of the securitisation framework strengthening management and supervision of liquidity risk for banks ensuring effective supervisory review under pillar ii enhancing transparency and valuation improving the quality of credit ratings for structured products strengthening authorities responsiveness to risk and enhancing robust arrangements for dealing with stress in the financial system,2
2476,in fact it has been argued that under the basel i accord regulatory capital arbitrage has been one of the main reasons why banks have adopted the originate to distribute model,2
2477,finally it should be noted that securitisation can also be a source of fees and income for banks with expertise in the structuring of assetbacked securities,2
2478,for instance it has been argued that while securitisation certainly spreads existing risks it may in fact encourage the creation of further risks particularly by relaxing the incentives for banks to screen and monitor borrowers in order to alleviate the informational asymmetries associated with credit contracts,2
2479,the possibility for banks to use as collateral abss that they have originated themselves may have prevented a complete shut down of primary markets,2
2480,among these measures some are particularly relevant the introduction of standards for disclosing the exposure to offbalance sheet items asset valuation methods where the underlying asset is illiquid more generally a higher degree of transparency for banks exposure to structured financial products,2
2481,what is also relevant is that financial institutions should strengthen their risk management practices including rigorous stress testing under the support of supervisors oversight,2
2482,moreover the turmoil highlighted the implications of the increased exposure of some banks to complex financial instruments which unfortunately was not always matched by a full understanding of the inherent risks and their possible impact on banks capital and liquidity positions,2
2483,supervisors will monitor the effective implementation of the new framework to ensure that relevant information is actually disclosed and that banks retain adequate capital and liquidity buffers commensurate to their risk profile throughout the economic cycle,2
2484,the third challenge for banks is to address vulnerabilities in their liquidity management practices,2
2485,4 according to this view the financial system may have inherently procyclical characteristics including proneness for asset price misalignment,2
2486,however in recent decades many banks have taken advantage of financial innovation and of developments in securitisation to progressively shift towards the socalled originate to distribute model,2
2487,in fact it has been argued that regulatory capital arbitrage has been one of the main reasons why banks have adopted the originate to distribute model,2
2488,important factors driving these adverse liquidity developments in the unsecured market were general uncertainty about banks subprime exposures and the scope for related writedowns resulting in declining lack of mutual confidence within the banking community,2
2489,finally regulatory incentives might have played a role as regulators may have allowed banks to apply better liquidity ratios to assets held with the eurosystem,2
2490,among the main areas of this work one of the most important aims at enhancing banks risk management practices and especially those related to liquidity risk,2
2491,against this background the internal corporate governance and organisation of liquidity risk management varied according to the individual banks structure and business model,2
2492,diminished liquidity in the markets that play a key role in enabling banks to implement their risk management strategies have led to a decline in funding liquidity at individual banks and given rise to adverse liquidity spirals,2
2493,at the same time i think it is legitimate to expect that banks will make substantial progress in addressing the weaknesses in their liquidity risk management practices that the current turmoil has revealed and that by doing so they should make it less likely that history will repeat itself,2
2494,with respect to monetary policy more developed financial markets such as developed bond markets or the availability of securitisation tend to increase competition and the speed of the passthrough of market rates to bank rates in the banking sector for specific bank product segments,2
2495,we know that low lending rates tend to encourage banks to increase risktaking 8 especially when low rates are coupled with strong financial innovation,2
2496,here i am referring to the role and effects of distortions in the incentive structures embedded in the business models of banks and other financial market participants in the originateanddistribute chain which have had a bearing on the provision of information about the quality of assets and the distribution accumulation and containment of risks in the financial system,2
2497,they have also contributed to the exponential growth of new financial instruments the adoption by banks of the originate and distribute business model and the increasing presence of new financial intermediaries,2
2498,third weaknesses in the implementation of the originateanddistribute model by banks and in the chain of distribution and acquisition of credit risks,2
2499,securitisation and the new bank model do entail economic and social benefits as they contribute to a better allocation of financial resources and a wider diversification of risks across markets and frontiers,2
2500,more generally the risk management systems and practices of banks and other financial institutions should be further improved,2
2501,such enhanced interaction would contribute to a better assessment of the potential systemic implications of financial shocks and assist in addressing market tensions or problems faced by individual financial institutions,2
2502,euro area financial institutions     during the past few weeks the focus on the implications of the financial market turmoil has concentrated on its potential effects on banks balance sheets and profitability,2
2503,reflecting these concerns forwardlooking financial market indicators such as banks cds spreads and share prices currently suggest that challenges pertaining to the banking sector are likely to remain in the near future see the chart on the right of slide 12,2
2504,clarity will also be needed on how liquidity providers intend to deal with their commitments to offbalance sheet investment vehicles and how much risk will eventually flow back onto the balance sheets of banks,2
2505,indeed the new accord strongly relies on significantly improved risk management in determining the appropriate level of capital buffers for banks,2
2506,nevertheless and despite these improvements the degree of sophistication of financial markets also calls for constant investment in stresstesting methods and practices in order to ensure that banks have full understanding of the potential losses they might incur in highly unlikely but plausible scenarios and that they are adequately prepared to address the associated risks,2
2507,furthermore financial intermediaries  in particular banks  will need to overhaul their liquidity management practices,2
2508,indeed during the current turmoil widespread uncertainty about the distribution of exposures to subprime losses across financial institutions has led to the inability of distinguishing sound from unsound financial institutions almost bringing interbank trading to a halt in august,2
2509,this type of action invites moral hazard as it may indeed be decisive to establish whether the single bank fails or not while at the same time sparing to the banks management and shareholders the substantial costs associated with resorting to real emergency liquidity assistance,2
2510,1 the stickiness of bank rates has been found to rely among other things on financial structures and competition within the banking sector as well as on competition from marketbased sources,2
2511,in addition over the past 2030 years we have observed a growing importance of a range of nonbank financial intermediaries which play an increasing role in the intermediation process and in a sense have reintermediated some of those assets leaving the banks balance sheets,2
2512,this may be illustrated by the following considerations first in the case of true sale securitisation in which the underlying assets are removed from the originating banks balance sheet it has provided banks with an additional funding source,2
2513,this was in particular an issue under the basel i capital adequacy framework where securitisation was often perceived as a mean for banks to arbitrage on the level of required regulatory capital,2
2514,notably the combination of new credit risk modelling techniques and credit derivatives has allowed an improved allocation and dispersion of banking book risk at the portfolio level which in turn may have enhanced banks ability to expand their balance sheets,2
2515,moreover the events have raised questions about the effects of credit risk transfer instruments on banks monitoring role,2
2516,thus according to the latest quantitative impact study qis5 capital requirements related to banks securitised assets may either increase or decrease depending on the type of bank and on the approach applied standardised or irb see bcbs 2006,2
2517,the current episode has also shown that the transfer of credit risk outside the banking sector may ultimately not be effective,2
2518,the recent developments were triggered by a perception of higher credit risk originating from a perceived deterioration of the credit quality of assets held both by banks and by special investment vehicles with which banks were associated either through liquidity commitments or reputation issues,2
2519,indeed intermediaries such as banks have become increasingly reliant on markets as a source of income and for their risk management through their hedging operations,2
2520,recent experience has shown how perceived opaqueness or uncertainty regarding the underlying exposures in particular of financial institutions has translated into a loss of confidence with a resulting disruption in the interbank market,2
2521,the complexity of structured finance products requires banks to have in place commensurately sophisticated risk management systems,2
2522,third for financial institutions the period ahead is likely to provide a first material test of the effects of changing banking business models to one whereby the securitisation of bank assets and the role of nonbank financial institutions have become increasingly important,2
2523,the complexity of structured finance products calls for banks to have in place commensurately sophisticated risk management systems including liquidity risk stresstesting,2
2524,the uncertainty about financial institutions potential exposure to us subprimerelated losses and to the valuation techniques of complicated structured credit products however does appear to have led to a lack of confidence among banks and thus tensions in the interbank money market,2
2525,i would like to stress in these concluding remarks that  despite all the financial innovations and developments of recent years  banks remain at the core of the financial system,2
2526,moreover conduits or spvs that manage cdos and credit derivatives written on bank loans are also created by banks,2
2527,new instruments contribution to financial development and integration    hedge funds private equity firms and credit risk transfer markets crt have the potential if the appropiate risk management setting is in place to improve the distribution of risk in the economy increase the liquidity in the financial system and in general improve firms performance thereby enhancing financial integration and stability,2
2528,as we have seen in the very recent evolution of credit markets problems in some of the banks offbalancesheet operations  for example in some conduits or in some funds associated with banks  may come back to and impact banks,2
2529,for operations with hedge funds and private equity firms it is important that banks properly apply adequate and sound risk management techniques and this despite rising competitive pressures in the market,2
2530,because of legal or reputational reasons banks are associated with or may be liable for risks that apparently are outside their books,2
2531,as regards developments in the bank lending behaviour there are some signs showing an impact of recent financial market volatility,2
2532,these exposures were sometimes sizeable but were not sufficiently significant to materially impact the soundness of core financial institutions,2
2533,moreover banks curtailed their lending to other banks because of uncertainty surrounding potential exposures of their counterparties,2
2534,what should be clear however from the current episode is that financial institutions should not rely exclusively on credit ratings for their risk assessments,2
2535,for example in recent years the supply of credit by banks has been affected by financial innovations  the securitisation of bank assets and the development of the credit risk transfer market  which resulted in the socalled originate and distribute business model pursued by banks,2
2536,and we have all witnessed recently some of the consequences of this bank business model and certain other features of financial markets,2
2537,although i would be very hesitant to impose limitations on the creativity of market participants in their pursuit of innovation and enhanced efficiency of the financial markets in my view instruments and structures that cannot be fully understood even by those who bear the ultimate responsibility of the level of risk taken by financial institutions should not be acquired or set up by banks and investors who are lacking sufficient sophistication in the management of the risks,2
2538,indeed basel ii strongly relies on significantly improved risk management in determining the appropriate capital buffers for banks,2
2539,notwithstanding these caveats stresstesting is an important tool in the process of risk management at a microlevel particularly in banks,2
2540,a second set of indicators aims to identify the major sources of risk to the financial sector and covers the competitive conditions in the banking sector credit growth and banking exposure concentrations and more generally asset price developments business cycle and monetary conditions as well as indicators of financial fragility in the counterpart sectors to banks primarily households and nonfinancial corporations,2
2541,a third set of indicators aims to assess the resilience of the financial sector based on its riskabsorption capacity given its financial condition as well as the appreciation by market participants of banks risks and the main sources of risk outlined in the first two sets of indicators,2
2542,nevertheless because the euro area financial system remains on average more bankbased than marketbased in terms of risktaking activity we devote quite a bit of attention to the banking sector,2
2543,these include the possibility that banks might tend to soften their risk and pricing standards more structurally,2
2544,on the contrary as banks placed greater emphasis on the socalled originate and distribute business model new opportunities have emerged for other financial institutions to acquire exposures to credit,2
2545,such a decline could expose several underlying vulnerabilities and trigger an adverse scenario that could involve      funding liquidity challenges for highly leveraged financial institutions   an unwinding of carry trades and possibly an unwinding of global imbalances    increasing credit spreads across the credit quality spectrum    increased asset price volatility in financial markets more generally and    reduced bank profitability as a result of lower trading revenues,2
2546,similarly if widespread problems were to emerge in hedge funds that are active in credit risk transfer markets this could spark a downturn in the credit cycle itself as it could impair the originate and distribute business model upon which large banks have become reliant,2
2547,however preexisting sources of risk and vulnerability remain and some have grown     the recent market jitters have confirmed concerns regarding previously identified risks and vulnerabilities and have revealed the relevance of some new risk exposures    vulnerabilities could be quickly unearthed if market liquidity were to decline abruptly and sharply possibly triggered by waning risk appetite as a result of a change in risk perceptions   releveraging in the corporate sector and the process of credit risk transfer from the banking system to other financial institutions and market participants which is associated with a greater emphasis on the originate and distribute business model by banks could constitute vulnerabilities in a less benign market environment and   global imbalances remain a mediumterm lowprobability but potentially highimpact risk for financial stability,2
2548,32 moreover in an environment of price stability but persistent rapid money growth and rising leverage financial liberalisation and integration could lead to the accumulation of financial imbalances over a number of years increasing the probability of a boomandbust cycle in financial markets with repercussion on price stability over the longer term,2
2549,secondly the link between the banking sector and the markets has been strengthened significantly with commercial banks shifting from acting as traditional financial intermediaries to functioning as credit risk originators and sellers as a result of securitisation processes and the increasing use of credit derivatives,2
2550,a new characteristic of todays financial markets is that hedge funds private equity firms and the banks financing these institutions all strongly rely on techniques for credit risk transfer crt to manage their risks,2
2551,similarly if widespread problems were to emerge at hedge funds or private equity firms which are active in crt markets this could even spark a downturn in the credit cycle if it were to impair the originate and distribute business model adopted by many banks involving securitisation and hedging of lending exposures,2
2552,in what ways can nonbanks be expected to contribute to future market developments which have traditionally been the preserve of banks,2
2553,on the other hand subsequent aggregation and structuring of credit risks would increasingly allow these risks to be transferred to market participants with different investment horizons assetliability structures and risk appetites who may be less vulnerable than banks in terms of managing liquidity interest rate and systemic credit risks,2
2554,as already stated banks are using credit risk transfer instruments including securitisation to distribute credit risk exposures acquired in their lending business to nonbanks,2
2555,in response to unanticipated events their investment strategies may react in a way that can suddenly lead to dangerous herding behaviour andor counterparty risk problems for banks,2
2556,for example in a wellintegrated financial sector crosscountry differences in the way banks adjust their interest rates to changes in policy rates should be very limited,2
2557,these banks have no incentive to change because of the potential loss of invested capital,2
2558,as banks are key hedge fund trading counterparties and lenders their exposures to hedge funds constitute a second channel through which hedge funds could affect financial stability,2
2559,this would imply significant asset portfolio losses for banks and other financial institutions,2
2560,while this may reflect the low probability assigned by market participants to the materialisation of the risks and vulnerabilities identified by our analysis it could also signify a favourable assessment of the shockabsorbing capacity of the banking system supported by comfortable solvency ratios and improved risk management,2
2561,see chart 11 the ofi sector comprises a variety of financial firms such as investment funds corporations engaged in securitisation lending and factoring or clearing houses which maintain specialised relationships with banks and whose operations may affect monetary developments in several ways,2
2562,the finding from this model suggests that banks may rather become more risky as markets become more concentrated,2
2563,indeed figures provided by the british bankers association earlier this year identified growing participation in this market of a variety of nonbank financial institutions which were involved in both the provision and purchase of credit risk protection,2
2564,only two years ago credit risk transfer was essentially a banktobank business at least in the eu as highlighted in a report of the banking supervision committee of the escb with banks seeking to better manage their credit portfolios or to act as facilitators of crt among other institutions,2
2565,first there are legitimate questions regarding the ability of all risktakers to assess the risks they assume through this market as effectively as the banking sector has been able to,2
2566,one noteworthy aspect regarding the former is the growing role of counterparty risk arising from the more extensive transfer of credit risk particularly when highly leveraged and concentrated hedge funds are counterparts to banks that have similar characteristics as seems to be increasingly the case,2
2567,another aspect related to the within the bank transfer of risk is the rapid evolution of the trading book from a tool to hedge credit risks to an actively managed portfolio,2
2568,indeed the blurring of the lines between the market risk in banks trading books and the credit risk in banks portfolios is one of the most formidable challenges stemming from the expanding transfer of credit risk,2
2569,there are also three special feature articles notably a discussion of macrolevel stress testing practices across eu countries an assessment of banking system risk using extreme value analysis and an investigation of the driving forces behind eu banks stock returns,2
2570,there are signs that in accordance with the recommendations of the counterparty risk management group ii report many global banks have successfully worked towards solutions to these problems,2
2571,the generally positive assessment of large euro area banks is complemented by a thorough analysis of risks related to interlinkages between banks,2
2572,with this in mind special feature a takes stock of various conceptual aspects of designing macrostress tests for the banking sector with a focus on credit risk,2
2573,market participants perceptions of banks risks have continued to diminish also recognising banks greater ability to manage and shed risks in their balance sheets,2
2574,indeed while the risks of investing in different types of banks do not differ substantially under low volatility conditions such as the one that prevailed until recently the risks from investing in large euro area banks increase considerably when market volatility goes up,2
2575,notable in this regard is the substantial improvement in this indicator for the most risky banks,2
2576,overall while a positive outcome remains the most likely prospect the possibilities that the riskmanagement systems and lossabsorption capacities of financial institutions may be severely tested while still small cannot be excluded,2
2577,in the area of banking supervision the main priority is to ensure that all competent authorities involved in the supervision of a crossborder bank have adequate access to information regarding the risk exposures and management of the respective institution,2
2578,i will list them using the same sequence of financial and banking markets that i used when describing the state of financial integration,2
2579,with a predominantly bankbased financial system in europe until some years ago some may have argued that it was not so obvious that the condition of insurance companies and pension funds mattered for financial stability,2
2580,furthermore over recent years insurance companies and pension funds as net sellers of credit risk protection instruments have increased the capacity of the banking system to absorb adverse shocks,2
2581,22 interplay with the banking sector     the first contagion channel involves the credit risk exposure of banks to insurance companies and pension funds the second is related to specific risks associated with the bancassurance model,2
2582,over the last few years the increasing exposure of banks to insurance companies through credit risk transfer instruments as well as the incomplete transparency on the nature and the amount of risk effectively transferred had fuelled some concerns for the stability of the banking sector,2
2583,however if we look at the concentration of credit risk exposures of some banks to the insurance and pension fund sector in the euro area  through direct lending and securities holdings  which is the adequate measure to assess risks to financial stability then the credit risk represented by institutional investors appears to be significant,2
2584,growing linkages between banks and insurance companies via the bancassurance model could under certain conditions present a threat to financial stability,2
2585,in the euro area the significant presence of insurers in the capital of some large banks constitutes a potential contagion channel to the banking sector,2
2586,as insurance companies are under a different regulation than banks risk transfers from the banking entity to the insurance part may lower the capital charge of the group without reducing the overall risk thus potentially increasing the fragility of the group,2
2587,3 impact on financial markets   turning to the third channel through which insurance companies and pension funds can affect the banking sector i would like to highlight that significant portfolio reallocation or unwinding of major derivative positions by such entities might have a potential destabilising impact on asset prices,2
2588,these challenges will come sooner or later and will force banks to take advantage of cost savings via infrastructure pooling,2
2589,the traditional loandeposit activity of banks has been shaken by at least five major new combinations in the schumpeterian sense     securitisation  the shift away from the dominance of nonmarketable instruments bank loans and deposits to marketable securities    institutionalisation of investment  preserving the role of bank and nonbank financial intermediaries despite the increased role of securities markets    growth in complex financial instruments  designed to unbundle trade and transfer risks   conglomeration  the conduct within one financial institution of at least two of the three traditionally distinct activities of banking securities and insurance and    consolidation  the outcome of mergers and acquisitions both within and across sectors of the financial system,2
2590,another way to avoid excessive regulation and to remain adaptable to changing conditions is to put more emphasis on adequate governance structures and banks own riskmanagement systems rather than detailed prescriptive rules  what i called processoriented regulation in the first part of my talk,2
2591,this framework allows banks to use their own internal models to calculate capital requirements for credit risk and operational risk provided that some requirements are met,2
2592,deeper financial integration can offer more possibilities for financial institutions to better manage and diversify their relevant risks and realise economies of scale,2
2593,moreover target2 will offer on a targetwide basis new functionalities enabling banks to better integrate their euro liquidity management,2
2594,if we take the deep liquid and unified us financial markets as a benchmark it is patent that the euro area still has some way to go especially as regards the integration of equity markets the establishment of common legal and regulatory frameworks and the consolidation of the banking sector,2
2595,financial integration can provide the necessary conditions for a smoother absorption of shocks by financial institutions and offers them more options for managing and diversifying their risks,2
2596,furthermore banks solvency ratios remain comfortable suggesting that banks have sufficient capital buffers to withstand potential shocks of various origins,2
2597,from the perspective of financial stability a key issue  already identified in the aftermath to the ltcm case  remains whether banks are well equipped to manage the risks associated with the different forms of exposure to hedge funds,2
2598,in particular the supervisory review process pillar ii of banks internal risk assessments is expected to provide supervisors with the necessary tools to address the risk management practices of banks also in their dealings with hedge funds,2
2599,recent surveys on banks practices at the eu level show that banks have in general significantly improved the management of risks associated with hedge funds in the recent past,2
2600,moreover target2 will offer new functionalities enabling banks to better integrate their euro liquidity management,2
2601,what can be a problem is the fact that these additional risks are normally not managed together in the credit departments of banks but rather disseminated through different departments within an institution,2
2602,if we take the deep liquid and unified us financial markets as a benchmark the euro area clearly still has some way to go especially as regards the integration of equity markets the establishment of common legal and regulatory frameworks and the consolidation of the banking sector,2
2603,a robust capital adequacy framework for banks is a key condition for a single financial market,2
2604,the need to revise the requirements is the result of an important gap that exists between the present rules and banks risk management practices,2
2605,globalisation the shift towards marketbased financing and the speed of financial innovation have all significantly changed banks risk profile,2
2606,our concerns relate in particular to the reliability of calculated fair values the comparability across institutions and the impact of changes in a banks own credit risk on its capital position,2
2607,in particular those proposals relating to an extensive use of fair values raised concerns about the possible adverse implications on the volatility of bank income and eventually on bank behaviour and on financial stability,2
2608,with increasingly frequent ties between bank and nonbank institutions through ownership and lending relations like in bancassurance groups this means that problems in nonbank financial institutions can now produce financial stability concerns through the banking system exposure to them,2
2609,contagion risks via money and derivative markets have become a substantial part of the overall risk profile of financial institutions,2
2610,in the area of market risk management the main international banks have responded to the changing environment and the market turmoil of the late1990s in particular with investments in risk management technologies,2
2611,the revision of the basel accord  the international benchmark for banks capital requirements  is strongly supporting the development of banks credit risk management tools,2
2612,the basel ii framework will introduce a significantly more risksensitive approach building on banks internal risk management systems,2
2613,the second challenge faced by banks in recent years was that not long after the banking sector had begun to adjust to operating with a new currency  including all of the efforts that this entailed  an exceptional series of adverse events followed in quick succession,2
2614,this helped to counteract weakened corporate lending and the marketrelated activities of banks,2
2615,risk management has been growing in importance and is becoming more integrated in banks overall decisionmaking,2
2616,although concerns have been voiced about the spectacular growth in credit derivatives they also allow banks to better shape their risk profile,2
2617,through joint projects such as the one being undertaken by federations of savings banks to develop risk knowhow and management systems advanced risk management tools have also become available to smaller institutions,2
2618,the profitability pressures i described earlier have not led banks into immobility in fact they have been quite responsive in taking corrective measures,2
2619,it will also build on the internal risk management systems of banks,2
2620,a major recent example is the emergence of instruments to transfer credit risks between banks and other financial institutions,2
2621,this is changing the activities and risk profiles of financial institutions as previously credit risks were largely confined to banks,2
2622,in europe most historical periods of financial instability have been linked to traditional loan losses by banks,2
2623,in addition banks may hold significant exposures with nonbank financial institutions which themselves suffer from direct market exposures,2
2624,turning back to the credit risk transfer instruments these instruments allow banks to sell their credit risks and in so doing the risk profiles of other financial institutions particularly insurance companies are also transformed,2
2625,hence a major outcome of the financial innovation process is the transformation of the traditional risks faced by financial institutions,2
2626,the financial innovation process has indeed necessitated the revision of the traditional supervisory approach concerning banks and other financial institutions,2
2627,it has also made it imperative to ensure that the risk management systems of the financial institutions themselves are able to handle the complexity of their activities,2
2628,empirical investigations recently conducted by the ecb suggest that the extensive use of fair value accounting could significantly increase the volatility of banks balance sheets,2
2629,as regards banks the first basel capital accord agreed in late 1988 has served its purpose well in terms of raising the capital levels of banks and making them safer,2
2630,the basel ii accord is aimed at bringing the capital requirements closer to the true economic risks in banks portfolios and at offering a wide range of options and approaches to respond to the increased complexity of financial instruments,2
2631,an important byproduct is therefore that there is a lot of pressure on banks to improve their risk management systems,2
2632,furthermore when banks are allowed to be active in a wide range of activities such as in the securities insurance or real estate markets and when banks can own or control nonfinancial firms or vice versa credit may be better allocated andor more credit may be available to entrepreneurs,2
2633,fourth there are several complementary public policies that are typically needed to sustain or build up confidence in financial institutions,2
2634,capital adequacy is in simple words rules and regulations which require banks to hold sufficient capital to cover the risks they undertake,2
2635,a prerequisite for turning these possibilities into reality is that banks can compete effectively on the same scale as other institutions in the financial markets,2
2636,although financial integration provides banks with enhanced possibilities for risk management it has at the same time increased the probability of systemic risks,2
2637,since the fragility of banks and their counterparties tends to be heightened when prices are unstable the pursuit of price stability can be seen as a crucial contribution to financial stability,2
2638,while progress in this respect has certainly been very significant and impressive it remains the case that potential credit and asset price cycles and increased exposure of banks to financial market fluctuations might leave scope for more forwardlooking supervisory measures,2
2639,in addition credit positions across banks in netting systems can constitute a source of contagion risk,2
2640,efficient banks are more likely to promote financial innovation by allocating capital efficiently towards the most rewarding projects,2
2641,a rapid increase in banks financial marketrelated activities has heightened their exposure to swings in prices on financial markets implying that banks stability may be increasingly vulnerable to market instability,2
2642,some of these theories centre on banks being trustworthy enough to provide customers with liquidity and a safe investment haven,2
2643,whilst in periods of financial market turbulence there is no doubt that the role played by banks in terms of acquiring expertise on the creditworthiness of their customers and developing close links with firms management most certainly has its advantages with regard to maintaining financial stability i do subscribe to the commonly held view that a financial system with a broad range of products and suppliers of services is the best way of meeting the diverse needs of the customers,2
2644,furthermore in order to limit potential liabilities savings banks were usually limited in the type of assets they could hold,2
2645,some of the largest eu banks hold majority stakes in many acceding country financial institutions and have brought in their managerial expertise and funding from the parent institution,2
2646,due to the focus on the resilience of the financial system it would not classify each individual bank failure or each large swing in an asset price as proof of financial instability,2
2647,but as i will argue current trends in bank structure and competition seem to be putting pressure on banks to limit the scale of their relationship lending activities,2
2648,there is also evidence that the banks which have been involved in mergers tend to limit the scale of their lending relationship activities,2
2649,in conclusion recent trends in the european financial markets seem to have put pressure on banks leading some of them to reduce the scale of their relationship lending activities,2
2650,a prerequisite for transforming these possibilities into a reality is that banks can compete effectively on the same scale as other institutions in the financial markets,2
2651,in general terms financial integration allows more risk diversification and permits banks to use more advanced risk management instruments and systems,2
2652,euro area banks are important players in the area owning a significant share of local banks capital and around 80 percent of total bis reported banks claims on the region,2
2653,this approach ensures consistency across financial institutions but it disregards substantial diversity in their risks and business activities,2
2654,we should be aware that the shift towards the use of internal risk measurement systems for regulatory capital purposes has the likely implication that the capital base of financial institutions will become more dependent than before on the way the management of risk adapts to changing economic conditions,2
2655,it is widely recognised that the amount of capital required under the new basel accord would significantly increase in a recession if banks continue to apply the currently most widespread pointintime risk measurement methodologies,2
2656,accordingly this type of risk measurement may lead banks to restructure their portfolios when the economic conditions change,2
2657,iii one important aspect of consolidation concerns the role of the banks and their competitive position in providing securities services,2
2658,third it is well worth examining the precise impact that the insourcing of the securities services by banks has for both the consolidation of the industry and the oversight supervision and financial stability functions,2
2659,moreover such a strategy makes the banks vulnerable to inroads by more focused and lowercost providers,2
2660,before starting i would like to note  and i will justify this later on  that i do not consider it desirable to abandon the distinction between banks and nonbank financial institutions as regards access to the public safety net,2
2661,notwithstanding increased competition from nonbank intermediaries the importance of banks has not declined either,2
2662,all in all securities activities have become more important for many banks either directly or via their subsidiaries thereby establishing a strong bridge between banking and securities activities,2
2663,the recent products are such that investors no longer hold claim against the lending bank as this can transfer completely the credit risk to other banks or other financial institutions such as insurance companies and investment funds,2
2664,one is that banks are losing their monopoly position over instruments involving credit risk as credit risk can be traded and reallocated to other financial institutions,2
2665,complex risk transfer instruments have reduced the dominance of banks in the credit business,2
2666,with regard to risks for individual banks their participation in securities activity  stemming from the developments i just reviewed  changes the risks to which they are exposed increasing the importance of some and reducing that of others,2
2667,rather than even trying to strike any balance between the risks and benefits i would like to flag the consequent changes in banks risk profiles,2
2668,indeed some financial institutions have already started to develop integrated approaches to the management of credit and market risks,2
2669,quantitative tools are being expanded by many banks into the credit risk area as well  also because of the upcoming changes in bank capital regulation which allow the use of banks internal rating systems,2
2670,many institutions  including institutional investors investment banks and other regulated or unregulated entities as well as banks  can engage in proprietary trading at their own risk and hold positions in complex financial instruments,2
2671,whereas significant credit exposures have traditionally occurred mainly within the banking system from clearing and settlement systems and interbank operations the increased trading in complex financial instruments has led to a potentially important concentration of credit exposure of banks visàvis securities firms,2
2672,however the risks for banks could be greater from other financial institutions than from non financial firms because financial institutions can be highly leveraged have very large market positions and can have closer links with banks,2
2673,however  as i have stressed on other occasions  the reason why banks are special is not related to the nonmarketability of their instruments or the uniqueness of their individual products,2
2674,indeed the special role of banks in providing liquidity leads to the consideration that the extension of the public safety net to nonbank financial institutions or securities markets in general would not be warranted,2
2675,a closer control of banks is also needed to counterbalance the competitive benefits and potential moral hazard consequences which stem from the access of banks to the public safety net,2
2676,these requirements are increasingly applied in the banking sector since it is now widely recognised that market discipline stemming from enhanced transparency also provides banks with incentives to behave in a prudent and sound manner,2
2677,some stakeholders of banks might not have adequate incentives to monitor banks and exercise discipline on managers as they expect to be protected by the public safety net,2
2678,i took the view however that this should not lead to the consideration that nonbank financial firms have become sources of systemic risk in their own right as long as the banking system itself is not disrupted,2
2679,indeed the special role of banks in the liquidity provision remains a basic distinction between banking and securities businesses,2
2680,this prerequisite is that banks can effectively compete on the same scale as financial markets,2
2681,in order to address this issue in an effective way they should be able to bridge the gap between information of a microprudential nature namely information on the safety and soundness of individual institutions and macroprudential analysis which encompasses all activities aimed at monitoring the exposure to systemic risk and at identifying potential threats to financial stability arising from macroeconomic or financial developments,2
2682,but banks prefer  and who are we to interfere with that  to market their particular products and brand names individually,2
2683,moreover in this context the possibility of excessive risk taking in the banking sector should not be neglected,2
2684,in such circumstances some banks may misjudge the risks inherent in the new activities as a result of a lack of information knowledge or skill,2
2685,as you know nonbank institutions have already started to lobby eu institutions in view of obtaining an eu passport using the deficiencies of the banks in the retail field as an argument,2
2686,the establishment of a clear anchor for inflation expectations the integration of financial markets and the development of capital markets for private borrowers all have benefits in terms of the efficiency of financial markets,2
2687,a general remedy to the problem of potentially excessive risktaking by financial institutions is the improvement of disclosure practices whereby financial institutions inform the public about their risk profiles,2
2688,while there are new providers for these services banks could remain at the centre stage albeit with their services oriented more towards asset management,2
2689,for example in the 1990s certain large financial institutions published at no or limited cost the new methods of calculation which they had developed for measuring their market risk exposures as well as later their credit risk exposures,2
2690,this contributed to a relatively rapid spreading of the new risk measurement technologies amongst numerous financial institutions which needed to upgrade their risk assessment systems including in particular financial institutions located in the euro area,2
2691,the main focus of activity of the bsc is the analysis of structural developments and the monitoring of potential vulnerabilities in the banking sector,2
2692,as a result the banking sector has become more exposed to systemic risk,2
2693,rather its main objective is to assess the resilience of the eu banking sector to possible downward developments in asset prices,2
2694,furthermore the strategies for corrective actions in cases of bank fragility vary across countries,2
2695,the second and key proposition is that while banks are a multiproduct type of firm they nonetheless form a system,2
2696,the advent of the euro has indeed triggered a significant movement towards consolidation within the banking industry,2
2697,this may explain why the consolidation process within the financial industry when it has involved not only banks has very often focused on retail services,2
2698,historically bank supervisors have not been the most keen to promote competition and transparency in the banking industry because competition is bound to result in victims,2
2699,looking at the assets side first we see that new financial contracts such as derivatives or modifications of traditional contracts such as securitised loans have allowed financial intermediaries to unbundle products and risk profiles that were previously found on the bank balance sheet,2
2700,there are already nonbank institutions that actually or potentially provide core banking services or their close substitutes but i recognise the main counterargument that still the liquidity provision function is dominated by banks,2
2701,this practice is already quite significant and the public perception is that core banking services are produced by nonbank entities,2
2702,others have taken the view that banks as licensed and regulated core intermediaries can deal with the problems posed by highly leveraged institutions supplying liquidity when needed and carefully monitoring their nonbank counterparts,2
2703,most importantly the general public clearly perceives this kind of nonbank banking activities as carried out by entities that are not licensed or supervised as banks,2
2704,finally a definition of nonbank financial activity follows almost tautologically from the definition of bank activity nonbank financial institutions would be institutions that for their liquidity needs have to rely on the support of a bank,2
2705,recently robert merton and zvi bodie have argued that in order to eliminate the systemic risks involved in banking we should impose a narrow  bank model breaking up the maturity transformation and hence the two sided liquidity provision function carried out by banks,2
2706,while the ability of nonbank financial institutions to compete with banks on specific product lines is a positive development allowing the core banking service to be supplied by nonlicensed nonsupervised entities would seriously impair the resilience of the financial system,2
2707,the narrownarrow option identifies banks as providing liquidity on demand and lists a limited range of other activities that they can undertake,2
2708,in the extreme case all providers of financial services have to be licensed and supervised as banks irrespective of their liability structure,2
2709,in contrast with the first option the attention is focused on identifying the activities that only banks can perform rather than the business barred to banks,2
2710,but contrary to what has happened on the payments side with the creation of target it has been difficult for banks to reduce the costs linked to the use of custodian banks in the euro area because the securities settlement system industry is still very fragmented,2
2711,it is likely that the process of integration of the securities industry will affect also the activities of bank custodians,2
2712,i shall address developments in the money markets the bond markets and the equity markets as well as the process of adaptation of banking institutions to their new environment,2
2713,beside the establishment of nonbank subsidiaries there have been other strategic and organisational changes that have resulted in banks strengthening their securitiesrelated activities,2
2714,the trend towards securitisation can be regarded as one of the reasons for the structural changes in the banking system that appears to have accelerated recently,2
2715,in addition it shows that there is no systematic interest rate difference between the rates offered by banks established in different financial markets,2
2716,the increased scope for securitisation in europe will put further pressure on the banking sector to move away from traditional bank lending towards more specialised financial services,2
2717,these operations will aim at affecting the longerterm liquidity position of the banking sector visàvis the escb,2
2718,jointly with securitisation these advances in information technology have been leading to the unbundling of banking activities see rajan 1996 in the sense that activities formerly operated by a single bank are now processed by separate financial institutions,2
2719,the transformation of banking assets into tradable securities through financial engineering  will make further progress offering banks more flexibility in terms of assetliability management,2
2720,at the same time with securitisation in the broad sense the competitive disadvantage of traditional bank intermediation visàvis financial markets and nonbanks is likely to increase with differential effects on deposit collection and credit activities,2
2721,for efficiency reserve ratios might need to be imposed on a broader range of financial institutions than credit institutions alone,2
2722,one such potential conflict of interest may arise within any bank between the banks own risktaking activity and risktaking for its customers,2
2723,automatic stabilisers are smaller in the united states where government is smaller in relative terms government spending is worth 37 of gdp whereas it tops the 45 mark in the euro area countries 18,3
2724,but they always should be made in a responsible climate namely if tax reforms imply tax reductions they should not be without prejudice to the other goals that governments have namely to achieve the aims of the growth and stability pact that is to achieve the situation of a balanced budget or slightly in surplus of that,3
2725,averting it will require very ambitious and credible fiscal consolidation efforts,3
2726,whether other tasks could be assigned to this common fiscal capacity such as supporting allocative efficiency is a matter of choice not necessity,3
2727,9 this is because structural reforms not only reduce the amount of fiscal space needed for effective stabilisation but they also increase future fiscal space via higher potential output and hence higher government revenues,3
2728,the bipartisan congressional committee on deficit reduction did not reach an agreement on measures to reduce the public deficit,3
2729,it should not undermine the implementation of the strong national fiscal governance rules enshrined in the fiscal compact,3
2730,this may be a cause for concern considering that in some cases in the past such discrepancies were followed by significant upward revisions of the budget deficit,3
2731,applied to the united states this suggests that the sharp reversal of more than 4 percentage points in the us fiscal deficit between 2001 and 2004 contributed between 0 and 12 percentage points to the us current account deficit over that period,3
2732,fiscal debt in advanced economies is on average approaching a level that is utterly unsustainable and needs to be swiftly and forcefully countered,3
2733,7 in the us this form of risksharing has been shown to be more important than federal budget transfers,3
2734,the achievement of the primary budget balance target for end2015 was supported by a series of important policy actions especially on the revenue side,3
2735,these countries can now allow the worsened economic conditions to have a negative effect on public finances without taking countervailing fiscal action,3
2736,first national fiscal reforms  to which i alluded before  need to find an anchor and a collective guarantee in renewed and strengthened institutions for multilateral budgetary surveillance,3
2737,the change in policies and the structural reforms implemented contributed to a notable reduction both in their external and fiscal imbalances,3
2738,little progress was made in restoring sound fiscal balances last year in countries with significant imbalances,3
2739,although the fiscal situation varies across countries fiscal deficits are on average high and even very high in a number of new member states,3
2740,beginning with some of the most important real economy channels it is well known that the public sector financing needs created by sizeable fiscal deficits often crowd out private sector financing,3
2741,the authorities should not unravel their multiyear efforts to cut deficits but should reduce the debt ratios without delay in line with the eus fiscal framework which has been considerably reinforced over the past few years,3
2742,the fiscal rules have repeatedly been broken and trust between countries has been strained,3
2743,following similar reasoning there is a strong case for retaining and even strengthening national and in some cases subnational responsibilities for fiscal policies,3
2744,fiscal policy can support growth by ensuring that consolidation has a better composition  less focused on raising taxes more on prioritising expenditure  but it makes no sense to unwind consolidation now that the hard work has been done,3
2745,the targets envisaged in the current stability programmes to bring down government deficits and debt levels represent a minimum requirement for most member states rather than a final aim,3
2746,the quality of the fiscal measures  both in spending and taxation  is also crucial,3
2747,the responsibility for fiscal and structural policies remains at national level,3
2748,looking at fiscal performance the picture is fairly mixed and there are considerable differences across the new member states,3
2749,spain  where fiscal consolidation had progressed more than elsewhere  will have to make sure that it keeps its fiscal credibility in the years to come in strictly meeting the requirements of the stability and growth pact,3
2750,a highly restrictive move allows a reduction of the deficit but may adversely affect growth and thus slow down the adjustment of the debt,3
2751,the first response is to ensure that fiscal consolidation which is necessary to contain debt levels is made as growthfriendly as possible,3
2752,the only thing we plead for is that those countries that have already reached their stated goal of a budget that is in balance or a surplus can let the automatic stabilisers work fully whereas those countries which are lagging behind in this process of reaching the goals of the stability and growth pact cannot and should not fully let the automatic stabilisers work,3
2753,in order to prevent problems like those experienced last year from recurring in the future it is vital that the commitments made to achieving balanced budgets by 200304 be firmly followed up in the member states concerned,3
2754,nowhere has it been established that the existing rules are the source of current fiscal problems,3
2755,on the institutional side the eus fiscal framework which is embedded in the stability and growth pact and that had been watered down in 2005 proved to be too weak to enforce fiscal discipline and was not implemented with sufficient rigour,3
2756,and they showed flexibility and solidarity at eu level fiscal and state aid rules were temporarily suspended and new common fiscal instruments were introduced notably next generation eu ngeu,3
2757,in fact i would even argue that there is an urgent need to accelerate our efforts to complete the emu architecture with a fiscal capacity,3
2758,the debt reduction would be funded by capitalised revenues from seigniorage or assigned taxes,3
2759,the pact calls for budgets that are close to balance or in surplus over the cycle deficits below 3 of gdp and a public debt level of below 60 of gdp,3
2760,these blocks in two words  we can continue discussing this later  mean that much more of what is national sovereignty is going to be exercised at supranational level that common fiscal rules will bind government actions on the fiscal side,3
2761,these pledges should be reflected in the 2008 budget plans so as to avoid repeating governments past failure to adjust fiscal balances in economic good times,3
2762,there has been a lack of enforcement of fiscal discipline at the eu level and insufficient national incentives to comply with the eu rules,3
2763,for 2008 countries with remaining fiscal imbalances are expected to pursue more ambitious than currently planned budgetary targets,3
2764,it is clear that fiscal consolidation is a major challenge for most of the new member states,3
2765,another danger is that fiscal consolidation will be delayed on the grounds that this is justified in order to finance structural reforms,3
2766,fiscal effort measured as the change in the structural primary balance has been significant in many countries see slide 8 chart on the left,3
2767,thats why as a second priority work needs to continue on designing a more complete fiscal architecture,3
2768,finally 2004 saw significant revisions of past deficit and debt figures in a few countries undermining the effectiveness of eu fiscal surveillance,3
2769,any steps beyond that would imply identifying common sources of funding either in the form of common tax resources or of common issuance of public debt,3
2770,but this was initially implemented mainly through preventive tools seeking to avoid excessive government spending at national level,3
2771,as a result of the financial crisis budget deficits in other industrialised countries such as the united kingdom the united states and japan have even reached doubledigit levels,3
2772,this refers to all the pacts starting from fiscal discipline in the member states to the commitment of the member states to pay their debts,3
2773,in the field of fiscal policy in particular this might encourage shortterm action focused on election dates resulting in a tendency to engage in deficit spending and growing government debt,3
2774,with national budget positions close to balance or in surplus countries have ample room for manoeuvre to cope with adverse economic developments,3
2775,in particular as regards the consolidation strategy and given that the tax burden is already high in many countries the fiscal adjustment will have to be primarily expenditurebased,3
2776,in this respect the dramatic acceleration of output in ireland in the post 1987 period can be associated with a vigorous and successful project of fiscal consolidation starting in 1987,3
2777,however in some cases the planned pace of consolidation is very slow indeed and many countries do not have sufficiently concrete or credible plans to comprehensively address the fiscal imbalances,3
2778,on the fiscal side although the general government gross debttogdp ratio stands below the 60 reference value the government deficit is still well above the 3 reference value,3
2779,to adequately address the longterm fiscal challenges and support higher sustained economic growth sound budgetary positions should be pursued in a more determined manner avoiding reliance on oneoff and temporary actions and employing effective policy measures embedded in a comprehensive reform strategy,3
2780,today national fiscal policies are subject to basic common rules as laid down in the stability and growth pact,3
2781,governments will have to comply with and as experience shows even reenforce the fiscal rules enshrined in the stability and growth pact,3
2782,but not keeping public debt and deficit in check would be tantamount to accepting that an ever greater share of fiscal revenues is channelled towards servicing debt instead of financing collective action  which comes down to accepting a loss of sovereignty,3
2783,a key complement to fiscal adjustment has therefore been structural reform,3
2784,such payments would ultimately have been financed from lower spending or higher taxes,3
2785,on the fiscal side member states often fail to make sufficient use of economic upswings to build fiscal buffers,3
2786,the fiscal compact can be complemented by measures to increase growth,3
2787,the treaty defines a balanced budget as a general budget deficit less than 30 of the gross domestic product gdp and a structural deficit of less than 10 of gdp if the debt level is below 60 otherwise it shall be below 05 of gdp,3
2788,however notwithstanding the efforts and the substantial progress made towards improving the current fiscal situation there is an ongoing concern as to whether the ratio of government debt to gdp will be sufficiently diminishing and approaching the reference value at a satisfactory pace and whether sustainability of the fiscal position has been achieved,3
2789,as we know from experience in many countries the necessary adjustment for correcting growing and persistent fiscal imbalances can be painful,3
2790,it seems clear that the ongoing economic recovery will not help to advance fiscal consolidation in a lasting manner because deficits are mostly structural and automatic fiscal stabilisers have a limited effect in most of these countries,3
2791,automatic fiscal stabilisers are mechanisms built into tax codes and social legislation,3
2792,the second proposition is that the best means to achieve the necessary coordination is a rulesbased framework which fosters transparency consistency and equal treatment across countries in fulfilling their commitment to avoid excessive deficits and attain sound budgetary positions,3
2793,major improvements are also needed regarding the production and quality of fiscal statistics,3
2794,the focus on fiscal sustainability and reducing public debt levels supported by more effective sanctions is a step in the right direction,3
2795,especially for those without fiscal space fiscal policy can still support demand by altering the composition of the budget  in particular by simultaneously cutting distortionary taxes and unproductive expenditure,3
2796,if the responsibility for these higher investments and the associated costs were to fall exclusively on the shoulders of the individual member states this could lead to underinvestment a less coherent and effective response to current shocks and a narrowing of fiscal space,3
2797,the possibility of the direct financing of the budget deficit by the nbh has been eliminated,3
2798,governments which already had significant fiscal imbalances ahead of the crisis exited from the recession with the highest deficit and debttogdp ratios recorded in times of peace,3
2799,however even in such cases the socalled fiscal clause applies which provides that the esas powers cannot impinge on national fiscal responsibilities,3
2800,fiscal stimulus is calculated as the change in the primary deficit adjusted for cyclical effects,3
2801,2 it addresses some of the weaknesses of the previous fiscal governance framework,3
2802,likewise greater risk sharing in the fiscal realm presupposes sufficient economic convergence among participating countries and the sustainability of public finances,3
2803,in addition deficits fell very slowly in 1998 this reduction in fiscal imbalances being the result of strong economic growth and falling interest payments rather than of genuine fiscal consolidation measures,3
2804,the recentlyagreed 750 billion eu recovery fund  the next generation eu initiative  puts in place a shared budgetary instrument that both complements and supports national fiscal actions,3
2805,note that the rules laid down in the fiscal compact concern the structural budget deficit not the cyclical component of the budget,3
2806,one notable example is the new fiscal compact which will provide a strong tool for keeping budgets close to balance in the future,3
2807,in other areas such as fiscal policy or structural reform it means accepting effective scrutiny from peers,3
2808,such needs for rebalancing are sometimes presented in overly simplistic terms namely that surplus countries should reduce savings and deficit countries should increase them mainly through consolidation of public finances,3
2809,so just as for the states in the us with their balanced budget rules the possibility that creditors might take losses is crucial to add credibility to the fiscal framework,3
2810,but higher deficits coupled with rising funding costs may limit the fiscal space available to shelter the economy from future shocks,3
2811,this has in turn allowed fiscal consolidation in the us and japan to be more backloaded,3
2812,common funding instruments would require shared decision making on national debts and deficits and probably joint control on fiscal expenditures and taxation,3
2813,christiano l eichenbaum m and rebelo s 2011 when is the government spending multiplier large journal of political economy vol,3
2814,and uncoordinated policies are not enough because the spillovers between countries from fiscal expansions are relatively low,3
2815,joint debt issuance cannot be a substitute for putting national fiscal houses in order and restoring competitiveness,3
2816,i havent even considered some of the shortcuts that according to some commentators and economists are supposedly available to countries unwilling to bear the costs of structural and fiscal reforms,3
2817,22aizenmann and pasricha 2013 have shown how the expansion in us federal spending during the great recession helped counteract the procyclical impact of balanced budget rules at state and local level,3
2818,in practice almost all such rules take the form of a mediumterm target for the government budget balance but the debt ratio is often also the subject of a fiscal rule,3
2819,the absence of such rules would possibly lead to higher deficits and debt but whether or not to adopt such rules is essentially a domestic issue,3
2820,in late 2009 and 2010 we have seen again high levels of volatility this time associated with concerns about the large fiscal imbalances in some eu member states,3
2821,second there is a need for the coordination of fiscal and structural policies that are conducted at the national level,3
2822,that said it is a fact that in some countries fiscal developments persistent current account deficits as well as financial sector developments and the employment performance are not satisfactory and will need to be carefully monitored,3
2823,by contrast once fully phased in the pact will discourage deviant behaviours in fiscal policy and at the same time restore governments capability to provide automatic stabilisation when general income conditions worsen,3
2824,fiscal policies should also strive to establish a well designed consolidation strategy in those countries struggling with increasing fiscal imbalances,3
2825,however some countries have not sufficiently grasped the opportunity to achieve a fiscal position close to balance or in surplus,3
2826,one of the main effects that the mismeasurement of price indices may have on fiscal policy is that it may distort the fulfillment of a planned public budget,3
2827,first discretionary policies can undermine the healthiness of budgetary positions as governments find it easier to decrease taxes and to increase spending in times of low growth than doing the opposite during economic upturns,3
2828,countries without fiscal space should not bend the commonly agreed rules which by the way provide sufficient flexibility to address the shortterm costs of structural reforms,3
2829,we have to be mindful that debtbased fiscal spending is no way to growth,3
2830,the imf estimates that relative to its projections in january 2020 fiscal deficits this year will be more than five times higher in advanced economies and more than twice as high in emerging market economies,3
2831,first the crisis has shown that fiscal credibility needs to be earned,3
2832,fiscal deficits have been significantly reduced and in those countries the primary fiscal balance is now positive,3
2833,but the pact did help correcting very high deficits and reversing the increase in debt ratios,3
2834,certainly it is about increasing spending control and tax collection,3
2835,one example is the notion of structural budget balance which member states are obliged to meet,3
2836,the fiscal framework has also been strengthened by several new pieces of legislation including the reinforced stability and growth pact and the socalled fiscal compact,3
2837,additionally sound fiscal policies create room for domestic economic management going beyond compliance with the stability and growth pact and say pursue the desired tax and spending policies,3
2838,in the context of this pact eu governments have agreed to reduce their government budget deficits to close to balance or even to create surpluses in the medium term,3
2839,but there are increasingly signs that such high levels of spending can have detrimental medium and longterm economic effects especially on growth and fiscal sustainability,3
2840,in concrete terms if a country records a budget deficit which is found to be excessive in the sense of the sgp it is certainly that countrys responsibility to correct it promptly,3
2841,low debt levels reduce the interest burden on the budget thus creating more room for growthenhancing tax cuts or for financing expenditure relating to ageing populations,3
2842,and the debate over these rules has intensified in the light of recent fiscal developments,3
2843,for these countries with a view to ensuring a sufficiently swift return to sound and sustainable fiscal positions it appears to be advisable to implement fiscal adjustment beyond what is required to correct excessive deficits and converge towards the mediumterm budgetary objective typically a balanced budget,3
2844,the conclusion therefore is that constantly tinkering with our common fiscal rules while leaving governance of structural policies entirely at the national level makes little sense,3
2845,4  accordingly it was agreed in the design phase of emu that explicit rules would be necessary to avoid high levels of public debt and deficits,3
2846,looking ahead a further decline in deficits is anticipated as a consequence of the cyclical upswing and the further reduction in interest payments in relation to gdp,3
2847,this will be the first line of defence against the accumulation of fiscal imbalances,3
2848,slide 2  the budget balances worsened in many new member states since 2000,3
2849,the pact which builds on and refines rules already laid down in the treaty on the joint surveillance of economic developments article 102 paragraph 3 and joint eu procedures in the event of an excessive deficit in one or more member states article 103 contains a shared goal for member states  namely that of bringing government budgets in the medium term close to balance or even into surplus and to take corrective action to avoid excessive budgetary deficits,3
2850,yet beyond the parameters for fiscal sustainability the framework allows for wide divergences in aggregate tax rates the share of the public sector in total output and for national priorities in public spending,3
2851,1 hence such spending needs to be prioritised in national budgets and in the eu budget and in particular in situations of fiscal consolidation,3
2852,if fiscal consolidation starts today then the generation which has benefited most from this debt will play the largest role in reducing it,3
2853,this applies not only to the size and composition of government spending but also to the quality of fiscal consolidation,3
2854,for example it is always easier to raise taxes than to reduce spending and to cut capital expenditure rather than consolidate current expenditure both of which lowered the quality of fiscal consolidation,3
2855,starting from fiscal policies in some countries there remain significant concerns about the sustainability of their own fiscal positions,3
2856,this runs contrary to previous wisdom suggesting fiscal policy should mainly support economic outcomes by playing the role of an automatic stabiliser for example in recessions government expenditure would automatically increase and tax revenue would automatically decrease,3
2857,8calmfors lars 2015 the roles of fiscal rules fiscal councils and fiscal union in eu integration in harald badinger and volker nitsch eds,3
2858,to some extent that depends also on the forcefulness of the new fiscal measures that are being decided and implemented,3
2859,there has been considerable variation across countries with regard to progress towards fiscal consolidation and the overall picture is fairly mixed,3
2860,first of all each government must deliver fiscal consolidation  this is the objective of the fiscal compact that was agreed on last december,3
2861,protracted excessive deficits may undermine the credibility of the eu fiscal framework thus casting doubts on fiscal sustainability and jeopardising the stability and growth pact,3
2862,with low fiscal multipliers too large policyinduced changes in expenditure or revenues would be needed to dampen the cycle,3
2863,by reducing and practically eliminating government deficits this can be guaranteed,3
2864,such unbalanced growth also had important consequences for the fiscal accounts chart 9,3
2865,in many member states even though quality improvements by changing the composition of fiscal spending are still possible high debt levels leave no room for fiscal manoeuvre,3
2866,deficit spending however is not devoid of problems not least because it can set in motion a dynamic that is difficult to contain,3
2867,plan a consists of greece implementing a fiscal and structural adjustment programme which would bring the budget and the debt under control,3
2868,looking at the recent budgetary developments it looks like most member states have now moved out of excessive deficits,3
2869,in order to be able to do that in a responsible way you have to create the conditions in the budget for that,3
2870,a set of rules imposed preventive limits on government borrowing requiring member states to achieve closetobalance budgets over the business cycle,3
2871,and for those without fiscal space fiscal policy can still support demand by altering the composition of the budget  in particular by simultaneously cutting distortionary taxes and unproductive expenditure,3
2872,the fiscal policy of the us has been relatively more expansive than that of continental europe largely because of the smaller role played by automatic stabilisers in the us federal budget which demanded a much larger discretionary adjustment,3
2873,a socalled fiscal compact will introduce fiscal rules in binding national legislation,3
2874,the fiscal compact  which requires countries to run balanced budgets over the cycle and reduce their debt levels progressively towards 60 of gdp  has to be written into national constitutions or equivalent and is overseen by national fiscal councils,3
2875,reducing public spending inefficiency would pave the way to financing tax cuts,3
2876,the fiscal policy framework suffered from weak implementation of the stability and growth pact sgp in particular after its reform in 2005,3
2877,and even where fiscal space is not available budgets can be designed in all countries in ways that are friendlier to growth,3
2878,it is in this sense that i have referred to the need for a growth compact alongside the wellknown fiscal compact,3
2879,closing the large fiscal gap for 201314 5½ of gdp will be a litmus test for the governments commitment to the programme without the governments willingness and ability to design and implement the difficult structural fiscal reforms such a large adjustment cannot be achieved,3
2880,beyond a further reduction of debttogdp ratios there are a number of other issues that have to be tackled by governments,3
2881,it remains to be seen how the discretionary fiscal measures adopted in response to the crisis can be wound down and reversed to support fiscal sustainability in the longer run,3
2882,this is in line with the conclusions of the latest g20 meeting in toronto where the g20 economies committed to fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debttogdp ratios by 2016,3
2883,in particular moral hazard could weaken incentives for governments to pursue fiscal consolidation to safeguard or restore fiscal sustainability,3
2884,do we the current generation take responsibility for the longterm fiscal challenges that we have played a large part in creating,3
2885,the eu rules guiding the design and implementation of national fiscal policies have been strengthened as well as in the legal frameworks of member states,3
2886,it is of particular concern that targets for correcting excessive deficits are at risk in some cases,3
2887,as regards fiscal union the four presidents report mentioned the need for true oversight over national budgets,3
2888,the reform effort to close these gaps have been substantial with the six pack the two pack and the fiscal compact to use brusselstyle acronyms,3
2889,in this context a widely shared concern at the start of the crisis was that the fiscal response in these countries would be insufficient,3
2890,the social costs are in the end equal to the aggregate cost represented by the higher interest rates that the governments of all the other countries have to pay for their debt because of the fiscal irresponsibility of the original country,3
2891,that is why further steps to reduce and share risks in the fiscal and economic spheres are critical,3
2892,we know that for several years fiscal policies in some countries have breached both the letter and the spirit of the pact,3
2893,fiscal policies were supposed to conform to the other form of governance where countries would decide on and execute their own budgets but within the strict constraints of the deficit and debt limits set in the treaty,3
2894,taking a longerterm perspective however there are reasons why the fiscal deficit may be less important than it may appear from this pure accounting perspective,3
2895,the first is the mandatory introduction of a balanced budget rule and a correction mechanism for deviations from balanced budgets at the national level,3
2896,that is why there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation,3
2897,the extent to which structural adjustments in government budgets would be required in order to achieve sound fiscal positions over the longer term has been illustrated recently by various calculations,3
2898,the ongoing broadbased expansion also calls for fiscal buffers to be rebuilt,3
2899,these arguments demonstrate a clear and important link between fiscal and structural reforms,3
2900,this would  and indeed will  complement full compliance with the reinforced eu fiscal and governance framework including rapid implementation of the fiscal compact,3
2901,conclusions to conclude it is therefore essential that consolidation targets are reflected as soon as possible in specific detailed tax and spending plans,3
2902,but the scope of pandemicrelated fiscal transfers will need to change from a blanketbased approach to a more targeted action plan,3
2903,an effective way of achieving this would be to swiftly implement strong national budgetary frameworks in the member states,3
2904,some go as far as saying that a single currency is viable only if there is a full fiscal union with a common budget and a transfer system which can account for asymmetric shocks and avoid divergences in nationalregional fiscal policies,3
2905,for the fiscal union finding the balance between cooperation and diversity is more difficult,3
2906,higher potential output raises future government revenues and  if credible  can restore some margin for manoeuvre,3
2907,to put it another way given the lower actual and potential postcrisis output and correspondingly lower postcrisis tax revenues precrisis spending levels are no longer affordable,3
2908,unification led to a massive expansionary shock and to high deficits in public budgets,3
2909,while fiscal policy has been forcefully countercyclical during the pandemic including the launch of the innovative next generation eu initiative the capacity of fiscal policy to support aggregate demand dynamics over the medium term is constrained by high aggregate national debt levels and the absence of a permanent central fiscal capacity,3
2910,the eus fiscal regime the stability and growth pact has been strengthened,3
2911,based on a direct estimation of revenue and spending rather than on the cyclically adjusted primary balance the cumulative fiscal consolidation achieved thus far is in excess of 10 of gdp in each of the three countries under euimf programmes,3
2912,finally let me point out that the success of fiscal adjustment and reform crucially hinges on political and public support,3
2913,finally the treaty obliges eu countries participating in the single currency to avoid excessive budget deficits article 104c,3
2914,this also applies to fiscal developments regardless of whether they are actual planned or promised,3
2915,this was in part because fiscal rules were implemented weakly not applied rigorously and subsequently watered down,3
2916,we need to see further significant progress on the reduction of excessive fiscal deficits,3
2917,despite many reforms the common fiscal rules that should deliver this outcome have lost traction,3
2918,and even in this domain the mechanisms that were envisaged to prevent and correct unsustainable fiscal performance by member states proved to be lacking,3
2919,to solve the crisis requires determined fiscal consolidation and ambitious structural reforms,3
2920,looking at recent fiscal developments in the new member states the picture is very diverse see slides 7 and 8,3
2921,at the heart of these questions are not only the credibility of governments policies and the actual delivery of the promised reforms but also the overall design of our common fiscal governance,3
2922,but as fiscal expansion in the other countries may have limited spillovers national fiscal policies remain constrained,3
2923,countries with fiscal space were not using it and those without fiscal space were trying to invent some,3
2924,18  fiscal expansion during and after the pandemic combined with the activation of the general escape clause under the stability and growth pact for a period of at least four years from 2020 to 2023 and the lack of a functioning eu fiscal framework risk contributing to higher inflation by weakening public perceptions that governments would stabilise public finances by taking the necessary future fiscal adjustments,3
2925,the fiscal compact is a fundamental restatement of the rules to which national budgetary policies ought to be subject so as to gain credibility beyond doubt,3
2926,the sgp and the necessity of a fiscal framework in general are being heavily tested by several countries especially by those which are subject to the excessive deficit procedure,3
2927,we have seen an impressive correction in current account deficits and fiscal deficits have declined,3
2928,the efficiency of such measures could be increased if they were accompanied by further budgetary consolidation focused on reducing spending rather than increasing the tax burden,3
2929,the stability and growth pact which complements and further specifies the eu treaty provides a set of rules for the national fiscal authorities with the aim to ensuring fiscal soundness by avoiding excessive deficits and safeguarding government finances as defined by the attainment in the mediumterm of budgetary positions close to balance or in surplus,3
2930,on top of this future generations will face a number of hidden costs that have not yet been factored into the debt figures,3
2931,in these circumstances there is no scope for activist government expenditure programmes which are questionable anyway with respect to their positive effects on growth over the medium term,3
2932,10 the imf finds that where countries have fiscal space temporary public spending can ease the transitional costs of some reforms,3
2933,as a result many countries already entered the crisis with weak fiscal positions which amplified the fiscal deterioration,3
2934,they should not only address excessive debt ratios but also apply when countries are not making sufficient progress towards mediumterm budgetary objectives,3
2935,secondly going on the framework issue if we look at current developments with the stability and growth pact and particularly the extraordinary promises of the current president of france that he will have tax cuts and public spending increases despite the commitments which he entered into at the barcelona summit whether you thought it was time to reinforce the framework of the stability and growth pact,3
2936,governments need to prepare for this burden before expenditure pressures start to increase rapidly after 2010,3
2937,due to a nonricardian treatment of public finances there is a role for fiscal policy in dealing with the situation,3
2938,15  few member states have fiscal space allowing them to spend more but all of them have the opportunity to spend better,3
2939,this normally means among other things consolidating budgets by raising taxes which makes the recession worse,3
2940,the budgetary provisions in the treaty which limit the level of government deficits and debts and the stability and growth pact which introduced the goal of budgetary positions close to balance or in surplus as a mediumterm objective for member states have been key to achieving sounder public finances,3
2941,it implies that in principle a change in the fiscal position should have no effect on the current account as it gives rise to an equal adjustment in private sector net savings,3
2942,decisionmaking on taxation and public spending is the core prerogative of national parliaments and for good reason but that does not mean that we should shy away from further fiscal integration in the long run,3
2943,a lax fiscal authority which seeks to avoid the shortterm political costs associated with enforcing fiscal discipline could be tempted to finance its budget through money creation,3
2944,running excessive fiscal deficits at the expense of future generations can be very costly in times of crisis,3
2945,7 marco pagano and francesco giavazzi 1990 can severe fiscal contractions be expansionary,3
2946,on the one hand policies to overcome the crisis  such as large fiscal measures  were clearly needed and have been put in place in all eu countries,3
2947,this resulted in an increase in the budget deficit and the need for an even larger support package,3
2948,this in conjunction with the maastricht treaty obligation to avoid excessive deficits and to apply appropriate implementation procedures such as the excessive deficit procedure edp secures the sustainability of public finances and provides scope for dealing with the expected fiscal challenges caused by population ageing,3
2949,slide 5 finally we have observed a very strong improvement in structural primary fiscal balances  that is fiscal balances adjusted for the economic cycle and for oneoff factors,3
2950,deficits are mostly structural and automatic fiscal stabilisers have a limited effect in most of these countries,3
2951,it was also improbable that fiscal risksharing would reach us levels not least owing to the relatively larger role for national budgets as fiscal stabilisers,3
2952,in addition the initial deadline for correcting an excessive deficit should be set such that a minimum fiscal adjustment of 05 of gdp per annum is required,3
2953,countries budget deficits have risen substantially on account of the crisis,3
2954,during the crisis governments were right to allow deficits to expand so that fiscal policy provided support to the economy in the short run,3
2955,it is argued that benefiting from additional common resources could lead countries to weaken their efforts to achieve sound fiscal positions and implement structural reforms which are typically costly in the short term,3
2956,the more positive side of the economic cycle provides in fact a fitting opportunity to procede further with fiscal consolidation as well as with the necessary reforms of the structure of fiscal expenditures and revenues,3
2957,moreover rising interest expenditure on government debt reduces the scope for public spending on other growthenhancing items,3
2958,fiscal policy    while a number of countries have managed to maintain sound budgetary positions over recent years in a number of other countries fiscal positions have deteriorated,3
2959,in the context of this pact it was agreed in the medium term to reduce government deficits to close to balance or even to create surpluses,3
2960,in all cases the fiscal adjustments mainly occurred through expenditure cuts 14 but they were also supported by lower interest payments due to falling interest rates,3
2961,the dire state of public finances represents another challenge as many countries find themselves with unsustainable fiscal positions,3
2962,taking into account the deep and prolonged recession the underlying fiscal adjustment has been even larger,3
2963,in a slow potential growth environment fiscal deficits have to become smaller to sustain a given debttogdp ratio,3
2964,a substantial number of such reforms entail better management of public spending therefore facilitating sound fiscal policies,3
2965,these lower funding costs have in turn resulted in significant government budget savings,3
2966,hence fiscal policies are adjusting as a response to the crisis,3
2967,against this background the major fiscal policy challenge is fiscal consolidation particularly for those member states with excessive deficits,3
2968,this may often reflect the cumulative effect of decades of political economy biases towards higher spending,3
2969,contrary to what is sometimes argued however this should not imply spending more taxpayers money but prioritising material and immaterial investment in budgetary plans and creating an environment that unleashes entrepreneurship,3
2970,we have seen many times in the past that procedures are too lengthy and laborious before effective action can be undertaken to incentivise or enforce on member states a correction in their fiscal developments,3
2971,the ecbs publication of the quarterly government revenue expenditure and deficit for the euro area based on contributions from nsis was recently complemented by fairly detailed data on government debt and the deficitdebt adjustment,3
2972,looking ahead further progress in fiscal consolidation requires the implementation of difficult structural fiscal reforms,3
2973,in part oneoff or temporary measures to improve the budgetary positions were implemented which as they had only shortterm effects did not correct the structural core of the fiscal imbalances,3
2974,so you can count for yourself to the extent that their budget deficits were to approach the 3 if it were purely for cyclical reasons i would make no problem,3
2975,the second implication that follows from not having fiscal transfers is that emu countries need to invest more in other mechanisms to share the cost of shocks,3
2976,the eu budgetary frameworks will also be strengthened including through the introduction of fiscal rules at the national level,3
2977,in view of still high debt levels in some countries and the adverse consequences of population ageing on budgetary expenditures countries may be advised to go even further and seek significant surpluses over the medium term,3
2978,this is a major advantage for those countries that managed to achieve budgetary balances or even surpluses,3
2979,moreover fiscal rules regarding budget deficits have the advantage of promoting an efficiency analysis of government plans,3
2980,fifth in any case fiscal consolidation cannot be limited to the correction of excessive deficits,3
2981,very much to the ecbs regret the reform of the stability and growth pact in 2005 weakened the fiscal framework substantially,3
2982,the effect is substantially higher than the effect of the federal budget,3
2983,this ability depends on keeping debt low and budget deficits close to zero when output grows at potential not on having more flexibility in the existing rules,3
2984,unless action is taken quickly these financial burdens will fall on future generations of taxpayers and may also threaten the soundness of government finances,3
2985,the more this has been complemented by both fiscal and structural reforms the stronger will be the effect,3
2986,however the size of public expenditure though probably affecting a countrys economic efficiency and thereby the functioning of emu is not an explicit part of the treatys fiscal rules,3
2987,to a considerable extent these savings stem from the forceful fiscal policy response to the crisis,3
2988,there should be greater focus than before on government debt levels more automaticity along with improved national fiscal rules and better statistical data,3
2989,while on the one hand an unbalanced fiscal position creates difficulties for the economy concerned if the government debt level is reduced to a reasonable level and fiscal deficits are close to zero or in surplus this creates room for manoeuvre in economic downturns for fiscal policy to act as an automatic stabiliser,3
2990,the pandemic has compounded an alreadydifficult fiscal agenda,3
2991,commitments would be more solidly anchored at the national level through new minimum requirements for national budgetary frameworks,3
2992,over time it will become increasingly clear that crosscountry differences in economic performance are to a considerable extent related to national fiscal and structural policies,3
2993,moreover in a number of new member states fiscal positions have been deteriorating in recent years,3
2994,but as i showed elsewhere 2 it would be asking too much of fiscal policy to think that it could have significantly offset this explosion of private expenditure,3
2995,public finances in several member states were marked by significant deficits a large part of which were of a structural nature,3
2996,it is imperative that forthcoming budget plans build on this favourable outcome assigning higher than expected revenues to deficit reduction and speeding up progress towards the achievement of mediumterm budgetary objectives,3
2997,introducing tax cuts without offsetting expenditure restraint results in fiscal imbalances putting at stake the consolidation progress made so far,3
2998,such measures would be helpful additions but the fiscal pact must not be renegotiated or weakened,3
2999,moreover  and this is something that tends to get overlooked  the implementation of spending budgets expressed in cash terms in a context of lower than previously expected inflation has meant more spending in real terms and of course higher deficits,3
3000,the increased focus on judgement under the new pact means that a broader range of fiscal outcomes are now possible,3
3001,all the governments of the weaker countries responded with fiscal consolidation policies initially hesitant then more vigorous,3
3002,give a close look to the level of current expenditure and the level of taxation,3
3003,11  fiscal incentives have also been shown to improve the effectiveness of reforms,3
3004,we need to halt any fiscal excesses early on and correct them,3
3005,fiscal policy should continue along the path of diminishing adverse incentives provided by tax benefit and pension systems while reforms on the expenditure side of the budget are also needed for progress along the way towards the mediumterm objective of attaining budgetary positions close to balance or in surplus,3
3006,more generally funds from the eu budget should be redirected to areas where the money is really needed and where its impact would be greatest,3
3007,it should be targeted so that the size of the fiscal impulse is limited and benefits those who need it most,3
3008,in view of the weakening economic outlook and the continued prominence of downside risks governments with fiscal space that are facing a slowdown should act in an effective and timely manner,3
3009,although its implementation has been far from satisfactory we should see that the stability and growth pact brought about significant improvements in the fiscal performance of the eu over the years,3
3010,as part of this enhanced framework the draft budgetary plans that countries will now deliver for the first time under the twopack regulations need to provide for sufficiently farreaching measures to achieve the fiscal targets in 2014,3
3011,these actions include tax breaks public investment and generous fiscal backstops such as public guarantees and credit lines,3
3012,but it is also clear that such a reflection would have to be part of a larger discussion on how to reinforce common decisionmaking over fiscal policies and strengthen accountability arrangements,3
3013,the fiscal authority could finance state expenditure by raising taxes but this would require the establishment of costly administrative structures,3
3014,had such a system been in place greece would neither have been able to hide nor incur the higher deficits and debts in 2009 or in the preceding years,3
3015,as far as fiscal policies are concerned we fully recognise that in a period like this fiscal deficits will come under pressure,3
3016,as pointed out by the ecb president in his 2014 jackson hole speech selective tax cuts should be matched by corresponding selective spending reductions targeting taxes with high fiscal multipliers and unproductive expenditures,3
3017,in addition other types of fiscal measures are currently at work,3
3018,structural reform and fiscal sustainability are underway but must be pushed to completion,3
3019,according to the oecds figures the budget balance in the united states adjusted for the economic cycle as a percentage of gdp shifted from a breakeven situation in 1998 to a 09 surplus situation in 2000 and then to a 45 deficit in 2003 and a 32 deficit in 2007 figure 2,3
3020,in addition to the combined contribution of national fiscal measures which are collectively more effective when calibrated in a coordinated manner the next generation eu ngeu initiative has a critical role to play,3
3021,today i have limited myself to considering the ecbs interest in just one side of the government balance sheet namely the revenue side and more specifically taxation and tax reform,3
3022,when a shock hits fiscal policies are forced to do all the heavy lifting to stabilise the economy and over time fiscal space becomes progressively exhausted,3
3023,however on the fiscal side deficits in 1996 substantially overshot the benchmark laid down in the treaty in most member states despite efforts at consolidation,3
3024,the full and consistent implementation of the pact is essential to ensure credibility and confidence in the eu fiscal framework to rebuild fiscal buffers in national budgets for potential challenges ahead and to safeguard public debt sustainability,3
3025,in turn the fiscal support to the economy substantially worsened public finances,3
3026,the latter may translate into a lack of funds and force a government to run a deficit to finance the extra expense,3
3027,and we must be aware of sound fiscal positions being also crucial for meeting increasing fiscal costs due to population aging,3
3028,as a result of this excessive deficit poland is currently subject to an eu council decision and must ensure that there is a sustainable reduction and correction by 2015,3
3029,there is also an expectation that national fiscal rules and frameworks should be improved although nonbinding,3
3030,it gives us a mechanism to stay focused on futureoriented investment even when national fiscal policies become less expansionary after the pandemic,3
3031,national budgets leads to the conclusion that in the absence of fiscal coordination the global fiscal policy of the emu would be the accidental outcome of decisions taken by member states,3
3032,however it is now time to prepare ambitious and welldefined fiscal exit strategies,3
3033,if there were to be a severe or prolonged slowdown in growth government deficits in a number of countries could easily approach or even breach the 3 deficit limit because current fiscal plans do not incorporate a sufficient safety margin to let automatic stabilisers work fully without the risk of budgetary positions becoming excessively imbalanced,3
3034,conditionality serves to ensure that governments continue to correct existing economic and fiscal weaknesses when omts are activated,3
3035,and what this implies is that if structural reforms do not happen there can be a form of structural dominance over fiscal policies,3
3036,in particular in these countries significant budget consolidation based on spending reduction enhanced the long term fiscal sustainability and increased the policy credibility of a more favourable tax regime,3
3037,however the notion of the law as the guardian of economic wisdom herdegen 1998 is widespread the fiscal responsibility laws in new zealand the constitutional obligations to produce balanced budgets in all us federal states except vermont or the golden rule of the german basic law which prohibits the government from borrowing more than it spends on investment are all based on this reasoning,3
3038,on the contrary we are seeing a clear gap emerging between the fiscal responses at the national level and the estimated economic consequences of the crisis slide 8 right,3
3039,national fiscal rules with a focus on domestic issues tend to neglect positive crossborder spillovers,3
3040,the fiscal compact supports this focus on prevention by creating a new first line of defence balanced budget rules with a constitutional status,3
3041,it is essential that in the budgetary plans currently being prepared for 2004 there be a correction of excessive deficits within the agreed timeframe in the countries concerned,3
3042,in principle stabilisation can also result from discretionary fiscal policymaking whereby governments actively decide to adjust spending or taxes in response to changes in economic activity,3
3043,starting with fiscal policy in recent years a few emu member states have exhibited considerable fiscal imbalances and have been under the excessive deficit procedure,3
3044,among other things this refers to the socalled excessive deficit procedure the contribution to the eu budget allocation of regional funds by the eu and the contributions of member states to the capital of the ecb,3
3045,while the first two are important to solve the problem facing a country affected by an adverse shock the third fiscal transfers only hides the problem,3
3046,a warning system is helping us in identifying risks arising from large and protracted swings in competitiveness as well as sustained budget deficits at an early stage,3
3047,indeed with regard to fiscal positions the slippages that have occurred in certain countries are causes of concern,3
3048,competitiveness problems and the need to improve the fiscal position added to the downturn,3
3049,while many of the new eu members face no major problems on that front others exhibit large and even growing fiscal imbalances,3
3050,although some progress with regard to fiscal deficits has been made recently much of this progress was due to the improving economic environment and revenue windfalls,3
3051,more worrying the lessons of 19992000 when extra revenues arising from the better than expected cycle were used to increase expenditures or reduce taxes rather than consolidate the budget do not seem to have been fully learned,3
3052,the stability and growth pact sgp was watered down in 2005 and has been ineffective in preventing the buildup of significant fiscal imbalances,3
3053,fiscal consolidation efforts have been limited in the past and a number of countries are in an excessive deficit situation,3
3054,i shall argue however that discretionary fiscal policies are not normally suitable for demand management as past attempts to manage aggregate demand through discretionary fiscal measures have often demonstrated,3
3055,11  incentives for ensuring sound national fiscal positions have as a consequence been insufficient,3
3056,the greater fiscal space also enables governments to redistribute the benefits of reforms across the whole population,3
3057,the key economic rationale for having a fully fledged fiscal union is to establish a common pool of resources that can be used to insure its members against adverse macroeconomic shocks and to reduce macroeconomic imbalances,3
3058,a full and consistent implementation of the stability and growth pact is key for confidence in our fiscal framework,3
3059,this was mainly due to two reasons  first at the national level incentives for ensuring sound and sustainable fiscal positions have been insufficient,3
3060,as is wellknown budgetary policies remain under national responsibility but effective common rules have been developed in the form of the excessive deficit procedure and the stability and growth pact,3
3061,as pointed out in the paper by gali and perotti 5  the stability and growth pact has not impaired the ability of eu governments to conduct discretionary countercyclical fiscal policy effectively and it cannot be considered responsible for the observed decline in public investment,3
3062,however as deficits surged and the greek government revealed a much larger deficit than previously thought the attention focused more on the state of public finance,3
3063,on the fiscal side the reform of the stability and growth pact and the new fiscal compact are specifically designed to catch imbalances earlier,3
3064,government budget balance in the euro area and in the united states       nb total budget balance shows degree of budget policys expansion or contraction,3
3065,fiscal policy can and should also help mitigate undesirable trend growth differentials through high quality expenditure and tax policies,3
3066,the existence of fiscal rules at the eu level codified in the stability and growth pact and in the treaty excessive deficit procedure was motivated by the need to ensure fiscal discipline preserve fiscal space and hence allow automatic stabilisers to play out in full during downturns,3
3067,in combination with an increased risk of adverse crossborder effects stemming from a lack of fiscal discipline in one country this suggests that further fiscal rules are necessary,3
3068,first convincing fiscal consolidation to redress the fiscal imbalances is essential,3
3069,i mentioned some countries already including my own country that has gone through a period of close to fifteen years in getting its budgetary house in order and which is now experiencing a surplus in the budget,3
3070,to tackle the crisis decisively first and foremost requires tackling its root cause will require ambitious fiscal policies and structural reforms,3
3071,what is also needed is a solid fiscal framework that ensures that the fiscal authority follows sound fiscal policies which are sustainable at the going price level,3
3072,this is an intergovernmental treaty which establishes among other things that member states must enact laws preferably at constitutional level requiring their national budgets to be in balance or in surplus within the treatys definition,3
3073,moreover countries with remaining fiscal imbalances reaffirmed their commitment to attaining safe budgetary positions by 2003 or 2004,3
3074,a fiscal expansion in the context of high and rising government debt may trigger an increase in precautionary savings and counteract the expansionary impact,3
3075,at the same time they often successfully managed to reduce their budget deficits,3
3076,national governments retain the principal ability to address both objectives as they retain control of fiscal policy and the capacity to undertake structural reform,3
3077,fiscal policy will have to continue the consolidation process and governments should abide by the commitments of the stability and growth pact and by those made in the context of their stability programmes pursuing further improvements on the expenditure and revenue sides of the budget,3
3078,21 it measures the variation in the budget balance as a percentage of gdp for a 1 variation in gdp,3
3079,that is the task of governments they must undertake determined policy actions to address major weaknesses in the fiscal financial and structural domains,3
3080,in 2003 they voted against proceeding with the excessive deficit procedure in spite of breaking the 3 fiscal deficit ceiling,3
3081,in the past this has also proven to me more effective than tax increases to achieve successful fiscal consolidation,3
3082,it provides a clear and transparent framework for putting into operation the reference values set by the maastricht treaty 3 of gdp for fiscal deficits and 60 of gdp for public debt,3
3083,there is an adjustment happening across the board with fiscal deficits and external deficits declining,3
3084,20 according to some this finding puts into perspective the absence of a european federal budget  akin to the us federal budget  capable of absorbing part of the idiosyncratic countryspecific shocks,3
3085,the problem the source of the current tensions clearly reside with national fiscal developments notably localised in those countries that have not done enough to correct imbalances or to prepare for difficult times when times were still good,3
3086,this means that the form of the fiscal compact cannot simply be replicated in a comparable growth compact,3
3087,several conference papers chinn and ito bems dedola and smets find that reductions in the government deficits do lead to improvements in external balances,3
3088,at the same time it is important to ensure that taxbenefit reforms are undertaken without jeopardising the longterm sustainability of public finances,3
3089,in emu this adjustment is being undertaken within a reinforced fiscal framework  a new set of rules  which strengthens the ability to prevent and correct the accumulation of excessive deficits,3
3090,this deterioration of the budgetary outlook was initially caused by large tax cuts which were welcome but which were not compensated by sufficient expenditure restraint,3
3091,in the light of these budgetary imbalances the stability and growth pact must be implemented,3
3092,in the current circumstances the stability and growth pact which has been put in place to safeguard sound and sustainable fiscal positions is facing its biggest challenge since its adoption in 1997,3
3093,and for the vast majority of reforms there is no obvious tradeoff with fiscal consolidation,3
3094,all fiscal rules have to confront such tradeoffs,3
3095,moreover national institutions for fiscal policymaking should support the fiscal commitments under the eu framework,3
3096,it also means continuing fiscal consolidation to rebalance public finances in line with the rules underpinning the stability and growth pact,3
3097,but in many cases it will also be essential to review government commitments especially their less productive elements,3
3098,in this context fiscal surveillance has been complicated by the difficulty of identifying budgetary trends,3
3099,this process has involved tightening the rules for fiscal policies and creating a much needed framework to monitor broader macroeconomic imbalances and competitiveness,3
3100,these national fiscal responses have been highly effective,3
3101,a similar effect applies to the interest expenses of the fiscal authority which may crowd out primary spending to the extent that governments react to an increase in borrowing costs by compressing discretionary outlays,3
3102,accordingly a fiscal brake at the eu level codified in the stability and growth pact was designed to prevent fiscal profligacy preserve fiscal space and hence allow automatic stabilisers to play out in full during downturns,3
3103,as long as the basic willingness to share fiscal sovereignty is lacking we could and should then agree that sovereignty will be relinquished if a member state does not comply with the jointly agreed objectives such as the deficit and debt limits,3
3104,7 this situation was often accompanied or intensified by an insufficiently tight fiscal stance even if headline fiscal numbers such as the deficit and the debt ratio still suggested a healthy fiscal situation,3
3105,only if tax reductions are accompanied by expenditure restraint can the achieved fiscal consolidation be safeguarded,3
3106,turning to the second challenge the current very high expenditure shares may also be a reflection of the way in which fiscal policy frameworks operate at the national level,3
3107,in addition to this lack of timeliness discretionary fiscal policy adjustments have shown two types of asymmetries that have undermined the sustainability of public finances,3
3108,there is an intense debate stretching from academia to policymaking circles on the extent to which a fiscal deficit translates into the current account,3
3109,thus it is important to recall that if tax cuts are to be sustainable and to contribute to raising growth in the longrun they need to be financed by equivalent reductions on the expenditure side,3
3110,in setting deficit and debt targets most notably the 3 deficit limit and establishing procedures for budgetary surveillance and control they are not fundamentally different from appropriate rules at the national level,3
3111,moreover in situations when the initial fiscal position of a country is unsatisfactory as reflected not only in the budget deficit but also in the public debttogdp ratio and the size of the unfunded future liabilities of the social security system an expansionary fiscal policy and the concomitant widening of the deficit may not have a positive effect on economic activity even in the short run,3
3112,therefore the commitment by the leaders of the g20 countries at the summit in toronto to pursue fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debttogdp ratios by 2016 is also an important step,3
3113,temporary revenue windfalls were used to finance permanent expenditure increases and some countries failed to achieve structurally sound fiscal positions despite a long period of strong economic growth,3
3114,the adjustment path towards a countrys mediumterm budgetary objective also needs more ambition,3
3115,a more timely fiscal adjustment would require the adoption of corrective measures already in 2010 absolute spending cuts in real terms or additional tax increases,3
3116,in the face of this hardship the strategy of reducing deficits has come under increasing criticism from commentators and politicians,3
3117,and it was those imbalances  fiscal macroeconomic and external  that were neither healthy nor sustainable,3
3118,overall if the elasticity of 03 between fiscal policy and the current account were to hold for the united states it would mean that 20 or less of todays us current account deficit of 60 of gdp could be explained by the us fiscal deficit,3
3119,this makes me sceptical of approaches based on tradingoff for example fiscal consolidation and structural reform,3
3120,if everyone thought instead in the most flexible and lax way we would risk providing unconditional aid and encouraging indiscipline in public budgets,3
3121,generally one is more cautious with regard to spending if one is also responsible for raising the necessary funding,3
3122,we also have to acknowledge that there is a lot of uncertainty regarding the short run effects of fiscal adjustment,3
3123,and as we have seen from our longstanding discussions it is certainly not politically simple regardless of the shape that such an instrument could take from the provision of supranational public goods  like security defence or migration  to a fullyfledged fiscal capacity,3
3124,fiscal policy has an important role to play in the implementation of the structural reform agenda via growthenhancing spending measures a reduction in government expenditure that can cause inefficiencies and market distortions the introduction of pension and health care system reform and the establishment of a tax system and incentives that can promote investment,3
3125,second far from being separated from fiscal consolidation structural reforms are essential to make fiscal consolidation work,3
3126,the structural budget balance is in effect the budget balance corrected for the effects of the business cycle,3
3127,in their 2011 budgets countries need to specify the necessary fiscal adjustment measures in detail while standing ready to correct any slippages from the fiscal objectives announced,3
3128,the determined pursuit of fiscal consolidation is all the more necessary as the accession process and the completion of the transition phase are likely to place further demands on the budgetary situation for example in relation to higher infrastructure investments or future reforms of the countries health and social security systems,3
3129,following a sharp increase in fiscal deficits latvias fiscal position has started to improve but the deficit remains at a very high level see slide 8 fiscal balances,3
3130,2 one explanation offered by the economic literature for such a change is that the us fiscal deficit which was to a large extent due to tax cuts could possibly be perceived in part as a permanent reduction in taxes and that the adjustment of the fiscal deficit would take place through a cut in nonproductive government expenditure,3
3131,in the absence of such action there is a risk that fiscal stimulus packages will simply trickle away leaving us burdened with the full load of outsized fiscal liabilities and with no prospect of a sustained economic recovery,3
3132,the stability and growth pact has been strengthened and a fiscal compact agreed in a very short period of time,3
3133,for several years fiscal policies in many countries have not been in line with the letter and the spirit of the stability and growth pact,3
3134,the process of widening budget deficits and the transmission of their effects on longterm growth is usually gradual,3
3135,these were however not enforced when cases of fiscal slippage arose later on and not backed by sufficiently strong national fiscal institutions,3
3136,what is therefore essential for a country with fiscal imbalances  an excessive deficit as defined in the treaty  is not only to achieve a budget deficit that does not exceed the ceiling of 3 of gdp but to achieve fiscal consolidation in a credible and sustainable manner,3
3137,this doom loop undermines national efforts to reestablish fiscal sustainability,3
3138,the pact calls for budgets that are close to balance or in surplus over the cycle deficits always below 3 of gdp and a public debt level of below 60 of gdp,3
3139,their actions to address fiscal and economic imbalances are bearing fruit,3
3140,it does include any cyclical impacts on government spending and revenue,3
3141,all this has been achieved in spite of the more rigorous budgetary policies of the member states at least compared with the previous decade,3
3142,structural spending cuts must be more ambitious in order to meet the objective of sustainable fiscal consolidation,3
3143,although the overall fiscal policy stance is satisfactory in most accession countries some countries have recently experienced worrisome developments of their budget situations that seem to have become derailed from the path of sound fiscal policy,3
3144,the road towards a fiscal capacity will most likely be a long one,3
3145,we have made national fiscal policies more responsible under the fiscal compact and subject to stronger surveillance,3
3146,moreover the quality of the fiscal adjustment was mixed,3
3147,among the relevant factors are current fiscal imbalances but also external imbalances and they could ultimately have repercussions on the general government budget,3
3148,i am talking to governments when i talk about budget deficits,3
3149,for example the deficit targets established in the 1985 budget and emergency deficit control act grammrudman act were abundantly breached and later relaxed,3
3150,at the same time government spending was increased by crisisrelated measures,3
3151,the second pillar of our building is a balanced budget in the words of erhard and strict compliance with the stability and growth pact in todays terminology,3
3152,today the government is deciding to give a fiscal bonus a tax surplus back rather than reducing public debt,3
3153,however there is no case for fiscal activism as this has often proved to be ineffective in the past and carries the risk of creating imbalances in public finances,3
3154,third fiscal policy was overall disciplined and indeed in a number of years fiscal surpluses were recorded,3
3155,and that normally means consolidating budgets by raising taxes which makes the recession worse,3
3156,the large revisions to greeces budget deficit for 2009 revealed a very serious fiscal imbalance and triggered adverse financial market reactions,3
3157,next generation eu is the largest fiscal package that has ever been financed from the eu budget,3
3158,some member states need to take additional measures to ensure compliance with the fiscal rules while others have scope to use available fiscal space,3
3159,in view of the level around 3 of many government deficits at the moment one must inevitably conclude that government deficits must continue to be reduced in the coming years,3
3160,this can in part be achieved through credible fiscal plans which act on the numerator of the debttogdp ratio,3
3161,they have obliged the countries concerned already at a relatively early stage to put on paper their post crisis fiscal adjustment strategies,3
3162,the fiscal compact strengthens this focus on prevention through a new first line of defence the introduction of balanced budget rules in the constitutions of member states,3
3163,2021 a green fiscal pact climate investment in times of budget consolidation policy contribution issue no 1821 bruegel september,3
3164,how can fiscal consolidation in the new member states with excessive deficits be made sustainable,3
3165,it also avoids what i have referred to elsewhere as structural dominance over fiscal policy which amounts to fiscal policies being forced to do all the heavy lifting to stabilise the economy and over time to fiscal space becoming progressively exhausted,3
3166,18 in the cases of the us and canada the adoption of fiscal federalism entailed a shift of state debt onto federal hands,3
3167,continued fiscal support will remain crucial to sustain the ongoing recovery  assuming fiscal spending is efficient and effective,3
3168,the effects of automatic stabilisers and discretionary fiscal stimuli lead to a sharp deterioration in fiscal balances,3
3169,solutions will need to be worked out whenever legacy assets threaten to overwhelm the fiscal capacity of member states,3
3170,yet the deficits disappearance proved shortlived negative balances were repeatedly recorded in the wake of the taxation and spending policies adopted by the bush administration,3
3171,22 the lower overall budget responsiveness to the economic cycle in the united states can be ascribed both to lower current expenditure elasticity and to low tax responsiveness compared with most of the countries in the euro area,3
3172,and i wonder how this squares because if you take the german case where the commission is forecasting a deficit of 27 of gdp for next year that would imply either phenomenal german growth between 2002 and 2003 with a cyclical uplift to the budget or presumably it would imply a very dramatic fiscal tightening which might make the recovery much weaker than it would otherwise be,3
3173,implicit fiscal assets are the discounted value of all future tax revenues,3
3174,moreover in a number of countries with fiscal imbalances adjustment efforts still fall short of what is needed to meet their respective mediumterm objectives in a timely manner,3
3175,nevertheless the size of the government is still too large compared to greeces capacity to generate and collect fiscal revenues,3
3176,6 proposals have been made to set up independent fiscal agencies with a clearly defined and limited role such as deciding on the overall fiscal balance and then leaving it to the political system to decide on taxes and expenditures 7 but they have not gained much traction,3
3177,fiscal consolidation is required to address the high debt and deficits and reduce funding risks,3
3178,this balancing act focuses on the quality of public expenditures and implies that deficits are justified only to the extent that they deliver sufficient returns in terms of future fiscal revenues through public investment supporting total factor productivity for instance or through the countercyclical impact of automatic stabilisers,3
3179,on the contrary prudent fiscal management provides the basis for balanced and sustainable growth,3
3180,some fundamental progress has already been made in tackling intraeuro area imbalances    budgetary deficits are being reduced,3
3181,a return to sound and sustainable fiscal positions is a key responsibility that has yet to be addressed,3
3182,finally a swift and decisive reduction of current debt levels should contribute to alleviating fiscal burdens and to preparing financially for upcoming ageing,3
3183,you have criticised the stability programmes of certain member states as regards their budget and debt levels,3
3184,in addressing the fiscal policy challenges faced by these countries one aspect deserves in my opinion particular attention namely that the appropriateness of the budgetary stance cannot only be judged with reference to the fulfilment of the fiscal criteria,3
3185,the budget implementation in 2005 and the preparation of the budget for 2006 both provide the first opportunities for all parties involved to rigorously implement the provisions of the pact so as to show that the pact remains an effective framework for fiscal policy coordination and discipline,3
3186,however in the latter two cases the esas powers are subject to the fiscal clause which provides that the esas powers cannot impinge on the national fiscal responsibilities,3
3187,countercyclical fiscal policy is based on fiscal rules that increase government spending in response to a negative output gap and reduce it in response to a positive output gap,3
3188,binding commitments by member states to implement strong national budgetary frameworks are key to ensuring national ownership,3
3189,another reason why the efficiency of the allocation of global savings may be an issue is that more recently the external deficit of the united states reflects actions by public entities rather than private sector interactions,3
3190,i consider that budgetary plans recently expressed in countries updated stability programmes are not very ambitious as tax cuts are not accompanied by appropriate expenditure restraints,3
3191,there is however an intense debate ranging from academia to policymaking circles on the extent to which a fiscal deficit translates into the current account,3
3192,countries are expected to anchor fiscal prudence in national rules,3
3193,finally the rules on fiscal deficits imposed by the stability and growth pact will continue to set limits on national governments for smoothing large shocks,3
3194,but fiscal consolidation alone would not have allowed the baltics to exit the crisis so swiftly,3
3195,in future excessive imbalances in public budgets and balances of payments of the member states are to be more effectively avoided,3
3196,thus from a pure accounting perspective the us fiscal deficit seems to be a key contributor to the persistent us current account deficit,3
3197,enshrining balanced budget rules in national legislation creates a new first line of defence against fiscal imbalances,3
3198,in many countries governments also need to press ahead with fiscal consolidation and fiscal reform,3
3199,in fact the main reason why several countries at present are in budgetary difficulties is because they have not used the past phase of higher growth to substantially improve their fiscal position ie,3
3200,15 the authors argue that this is due to an underestimation of fiscal multipliers which in turn led to an underestimation of the contractionary effects of the fiscal consolidation plans announced in early 2010,3
3201,first of all the greater the percentage of government spending over gdp the greater the budget positions response to fluctuations in economic activity,3
3202,the second model would involve sharing sovereignty on national fiscal policies with reciprocal control of public expenditures serving as a basis for common debt issuance by governments,3
3203,and expansionary fiscal measures have proven difficult to reverse exacerbating the deficit bias of governments,3
3204,only if national governments strictly adhere to ambitious fiscal consolidation and reform does it make sense to seek ways to buy some time to implement the planned measures,3
3205,the improvement seen in member states fiscal positions since the new pact was adopted is attributable largely to the recent cyclical upswing while progress with structural consolidation in countries with budgetary imbalances has generally been disappointing,3
3206,note that a precondition for receiving financing from the esm is to have fully ratified the fiscal compact which creates a link between crisis prevention and resolution schemes,3
3207,the reemergence of a deficit in a country which was determined to have ten years of a budgetary surplus adds to our uncertainties and makes the prospects for a sustained recovery more vulnerable but then again the us has surprised all of us,3
3208,against the background of the current economic good times it remains essential to step up the pace of fiscal consolidation in 2007 and beyond allowing unexpected tax revenue to be fully allocated to deficit and debt reduction,3
3209,some of them need to take additional measures to ensure compliance with the fiscal rules while others have scope to use available fiscal space,3
3210,the new focus on fiscal sustainability and reducing government debt levels backed by more effective sanctions certainly goes in the right direction,3
3211,this condition serves to ensure that governments continue to correct existing economic and fiscal weaknesses when omts are activated,3
3212,therefore maintaining sustainable fiscal budgets is a necessary condition to achieve distributional equality both intertemporally and intratemporally,3
3213,27 fiscal multipliers appear to have decreased over time and may even have gone below zero both in the united states and in the euro area countries,3
3214,budget balances last year were boosted by a pick up in revenues in particular corporate taxes in many countries which cannot be attributed to a discretionary tightening of fiscal policy in a strict sense,3
3215,finally government deficits and debt there are still countries in a situation in which a sound analysis is required under the terms of the treaty,3
3216,specifically omt conditionality ensures that countries commit themselves to a path of ambitious fiscal consolidation and structural reform thereby preserving fiscal sustainability,3
3217,instead todays fiscal policies often imply a shifting of financial burdens onto future generations of taxpayers,3
3218,in the us this form of risk sharing has shown to be more important than federal budget transfers,3
3219,the programme is a standard imf programme from the budgetary point of view based on substantial expenditure cuts and revenue increases as well as improvements in revenue collection,3
3220,this lack of ambition as regards fiscal consolidation which is not consistent with the provisions of the revised stability and growth pact and falls short of the political commitments made could potentially undermine the credibility of the new pact,3
3221,however on the fiscal side deficits in 1996 substantially overshot the benchmark laid down in the treaty in most member state despite efforts aimed at consolidation,3
3222,while a number of countries have managed to maintain sound budgetary positions over recent years fiscal positions in a number of other countries have deteriorated visibly,3
3223,today a number of countries have embarked in fiscal consolidation programs and as you know greece ireland and portugal are now implementing ambitious adjustment programs,3
3224,of course solving the problem is not easy in countries which suffer from significant fiscal imbalances,3
3225,this raises the question how should these countries tackle fiscal consolidation,3
3226,one key area is surveillance of fiscal policies to prevent excessive deficits and unsustainable public debt,3
3227,only if and when this guarantee is called will the corresponding amount be recorded as government spending,3
3228,such an approach is warranted in view of strong increases in government spending during the crisis in most countries,3
3229,but the scope and nature of fiscal measures should be different now,3
3230,unlike in other major advanced economies our fiscal stance is not based on a single budget voted for by a single parliament but on the aggregation of eighteen national budgets and the eu budget,3
3231,looking ahead it is of the essence that government policies decisively address these various fiscal financial and structural impediments to growth,3
3232,likewise a longterm sovereignty shift in both economic and fiscal policies will stimulate convergence towards similarly resilient economic structures based on common standards,3
3233,first fiscal policies behaved asymmetrically with expenditure increases in downturns not being followed by expenditure cuts but rather by tax increases during expansions,3
3234,2 and at the same time we need to work on the fiscal and economic governance to make sure that economic integration doesnt bring with it an increased risk of imbalances,3
3235,national governments retain the principal ability to address these objectives as they retain control of fiscal policy and the capacity to undertake structural reforms,3
3236,adjustment on the spending side accompanied by structural reforms to promote longterm growth has typically been the best strategy especially when combined with a credible longterm commitment to fiscal consolidation,3
3237,comprehensive and credible expenditurebased fiscal stabilisation programmes would in particular have positive supply effects as well,3
3238,as a result of the strengthening of the fiscal rules of the stability and growth pact and the introduction of the fiscal compact member states now face stronger incentives to adopt sound budgetary policies which are crucial for a smooth functioning of emu,3
3239,while some countries have succeeded in achieving and maintaining sound budgetary positions a significant number of others have not including the larger ones,3
3240,once fully phased in the pact will discourage deviant behaviours in fiscal policy and at the same time restore governments capability to provide automatic stabilisation when general income conditions worsen,3
3241,a rapid reduction in high debt levels is critical if such a large burden is to be borne without the need either for substantial tax increases or for severe expenditure cuts,3
3242,the relatively localised impact of climatic events or other shocks might have implications for fiscal policy with revenues typically falling and spending rising,3
3243,major tax cuts also contributed to the deterioration as they were often implemented without adequate offsetting expenditure restraints,3
3244,with the ability to vary fiscal policy and undertake structural reforms national governments retain the key powers to address the real needs of their economies,3
3245,for instance the new fiscal compact requires all member states to run a balanced budget over the cycle similar to the responsibility of individual states in this country,3
3246,8in terms of deficit the main methodological discrepancies between the us methodology and the european standards are mainly related to the sector delineation public corporations are included in the us government sector the recording of some military expenditures and the inventories held by governments,3
3247,what really was responsible for the recession of 20122013 was the coordinated fiscal consolidation in which all member states engaged,3
3248,with respect to fiscal consolidation it is clear that this is a demanding challenge for most of the new member states as they are confronted with competing expenditure demands,3
3249,most importantly the pact provides the appropriate policy framework for addressing countryspecific fiscal challenges,3
3250,partly however the deterioration of public budgets is also due to some shortsighted fiscal and economic decisions in the brighter times that preceded the crisis,3
3251,on top of this in 2009 greeces deficit more than doubled as a result of the global crisis and gravely because of an inflated and falsified preelection budget,3
3252,on a positive note we can say that while compliance with the stability and growth pact during its first ten years has been somewhat uneven the eus overall fiscal performance in terms of avoiding high budget deficits and the buildup of government debt was much better than in the decades preceding the pact,3
3253,turning to budgetary policies a return to credible sound and sustainable fiscal positions is urgently needed,3
3254,16  there is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden especially when the nature of the cuts make future tax reductions more likely,3
3255,moreover private net savings appear to have responded in a somewhat weaker manner to the large rise in the us fiscal deficit during that period,3
3256,so from our perspective when considering challenges for fiscal policy it is relevant to ask whether the objectives of public spending are appropriate and whether public spending is achieving its objectives in an efficient manner,3
3257,first massive fiscal support has preserved production capacity so far but has also led to sizeable budget deficits for 2020,3
3258,the longerterm sustainability of budget positions also needs to be ensured in several countries with regard to the consequences of planned fiscal reforms such as those of pension systems and the reduction of taxes,3
3259,why are these fiscal imbalances cause for such great concern,3
3260,such benefits come from a reduction of governments debt financing needs leading both to lower longterm interest rates and to the release of revenues to finance more productive expenditure or growthenhancing tax cuts,3
3261,governments need to be clear that current budget deficits are backed by future primary surpluses via either future higher tax rates or lower spending,3
3262,such flexibility is best provided via the socalled automatic stabilisers revenues and spending can vary in a proportionate and smooth way throughout the economic cycle while deficits and surpluses should broadly balance each other out in the course of time,3
3263,when talking about unsustainable policies it is straightforward to point to significant fiscal imbalances which have been accumulated in some countries,3
3264,since the process is gradual there are often depending on the prevailing economic situation and the initial fiscal position no visible strong indications of the ultimate adverse effects of persistently high budget deficits,3
3265,to this end the implementation of credible fiscal consolidation strategies based on growthenhancing measures can boost confidence and private spending and thus counteract the direct effects of budgetary measures on aggregate demand,3
3266,in a number of countries fiscal positions have deteriorated in recent years,3
3267,the latter part of 1996 saw a determined drive toward fiscal consolidation in italy and spain,3
3268,yet with demographic and other structural changes negatively affecting the structural budget position of countries discretionary fiscal measures that restore the longer term budgetary outlook are called for,3
3269,otherwise the current window of opportunity to build in fiscal room for manoeuvre before the fiscal burden of ageing becomes more acute will be wasted,3
3270,in particular we need to strengthen the surveillance of fiscal policies to prevent excessive deficits and unsustainable public debt with three main elements shorter deadlines under excessive deficit procedures quasiautomaticity in the application of sanctions based on clearly defined criteria and with less discretion over outcomes and ambitious targets for the reduction of public debt towards the 60 ceiling,3
3271,the first relates to the process of fiscal consolidation,3
3272,a determined pursuit of fiscal consolidation is all the more necessary as the accession process and the completion of the transition phase are likely to place further demands on the budgetary situation for example in relation to higher infrastructure investments or future reforms of the accession countries health and social security systems,3
3273,while we have long understood the national costs of failure to reform now we know that knockon effects can occur of neglecting fiscal sustainability and there are financial stability implications if reforms are deferred for too long,3
3274,in the budgetary field the maastricht treaty and the stability and growth pact imply that countries are now committed to achieving budgets which are in balance or close to balance and either to keeping the public debt ratio below 60 or to decreasing the ratio at a satisfactory speed if it exceeds the 60 reference level,3
3275,as long as we do not have a political federation with a federal budget this would create an incentive problem,3
3276,we cannot add to this edifice if its foundations are shaky that is if national budgets are not clearly sustainable,3
3277,debt has increased materially as a result of the pandemic and fiscal deficits remain sizeable slide 8 righthand side,3
3278,as regards the anchoring of the objectives of eu fiscal coordination in national budgetary frameworks it is of the essence that the directive is transposed into national law as faithfully as possible and no later than by the end of 2012,3
3279,announced fiscal relief measures  which represent up to 20 of gdp in the united states and in some euro area countries  are rightly acting as the first line of defence,3
3280,they were also arguing that without a federal budget it would be impossible to weather with the help of the fiscal channel asymmetric shocks hitting one particular member economy,3
3281,you very clearly made the point that member states should take fiscal action growthenhancing reforms,3
3282,in the case of greece there was an additional complication the previous government in an election year had hidden the sharp increase in the deficit from 5 to over 13 of gdp,3
3283,consequently when these countries headed into a downturn fiscal positions that looked healthy on the surface turned out to be precarious deficits rose sharply and debt ratios moved along explosive trajectories,3
3284,the fiscal package is expected to have a direct positive effect on the german fiscal balance of about 07 of nominal gdp in 2007,3
3285,there can be no doubt that a forceful fiscal response to the crisis was both necessary and adequate,3
3286,in terms of their budgetary impact only 1 of the total measures contribute directly to the green transition,3
3287,with regard to fiscal policies in the wake of the cyclical downturn observed between 2001 and 2004 some member states experienced significant deterioration in their fiscal positions and were accordingly subject to the excessive deficit procedure laid down in the treaty and set out in greater detail in the stability and growth pact,3
3288,this means that governments have to take responsibility for delivering sound budgetary policies,3
3289,i will now address these three issues  fiscal consolidation on the fiscal consolidation front we see significant progress,3
3290,asymmetric shocks  of any direction  which may affect the individual countries are left to the national fiscal policies but with an important restriction on the deficit side there are sanctions in the event of a budget deficit exceeding 3 of gdp,3
3291,it is a matter of evaluating not only from an economic but also from a political perspective the capacity and determination of a country to attain and maintain a primary budget surplus necessary to stabilise the debttogdp ratio,3
3292,in the field of fiscal policy the stability and growth pact has been created to ensure that member states keep their budgets in good shape,3
3293,as sovereignty over fiscal policies remains at the national level the eu member countries decided to introduce fiscal rules to help to prevent imprudent fiscal policies and their adverse effects on inflation and expectations,3
3294,the pact calls for balanced budgets over the cycle maximum deficits of 3 and a debt level of below 60,3
3295,this means that credible fiscal consolidation plans have to be implemented as early as possible including a consolidation effort of at least 1 of gdp per annum where necessary,3
3296,in particular the pact calls on member states to bring budget balances to their so called mediumterm budgetary objectives and maintain them at that level,3
3297,member states commit to run structurally balanced budgets and introduce a respective fiscal rule into their national primary legislation,3
3298,the italian government had taken measures which would lead to a reduction in the deficit below the reference value of 3,3
3299,this disappointing fiscal performance in a number of countries has placed a considerable strain on the implementation of the pact,3
3300,it will have to be complemented itself by the completion of the union in the fiscal economic and political fields as identified by president van rompuy last year,3
3301,in its first incarnation the stability and growth pact focused almost exclusively on fiscal sustainability with little emphasis on fiscal stabilisation,3
3302,constantly refining fiscal rules while leaving structural policies at the national level makes little sense,3
3303,to sum up a federal budget is better capable of addressing asymmetric shocks but not necessarily symmetric shocks and may not be the most efficient approach in an area which catchingup countries will continue to join,3
3304,the covid19 pandemic rising public debt but progress towards a stronger emu architecture the covid19 pandemic changed this,3
3305,in the us a mediumterm fiscal exit strategy has yet to be clearly specified,3
3306,second as regards the exit from high government deficit and debt governments should ensure that the withdrawal of fiscal measures starts no later than the economic recovery,3
3307,this is intended to ensure that the focus of the pact is on the structural budgetary position,3
3308,without a change in policy public spending due to ageing will lead to a growth in deficits and to an inevitable increase in the public debt,3
3309,national governments are addressing their fiscal imbalances,3
3310,this stems from considerable time lags involved in implementing fiscal measures,3
3311,perhaps the greatest battle that governments will have to fight in the coming decades will be the maintenance of a virtuous balance between longsought fiscal prudence on the expenditure side and the challenge to further reduce taxes,3
3312,they have executed a fiscal adjustment of historic proportions and embarked on the difficult road of structural reforms,3
3313,greater and more systematic efforts are however necessary to reduce fiscal deficits which on average were 53 of gdp in 2003 well above the reference value of 3 and in some countries substantially higher,3
3314,in addition large budgetary imbalances reduce the scope for fiscal stimulus measures and their effectiveness as a fiscal expansion in the context of high and rising government debt may trigger an increase in precautionary savings and show negative fiscal multipliers,3
3315,it took months for the greek government to realise that in light of the new data on the budget deficit it had to backtrack from its election promises and reverse its budgetary policy by 180 degrees,3
3316,major elements of the fiscal compact are the strengthening of the role of the balanced budget rule and a further tightening of the excessive deficit procedure,3
3317,for instance on the fiscal side greece has closed its structural primary budget deficit by around 13 percentage points of gdp since 2009 portugal by almost 75 pp ireland by around 65 pp and spain by more than 45 pp,3
3318,a particular challenge with financing at eu level similar to the federal level in the us is to overcome the juste retour approach which allocates projects according to national budget contributions,3
3319,regrettably fiscal developments have worsened recently in a few accession countries reflecting ongoing restructuring programmes and higher expenditures related to the adoption of eu standards but also the lack of a realistic mediumterm fiscal strategy,3
3320,at the same time they have often successfully managed to reduce their budget deficits,3
3321,member states failed to adhere to their mediumterm budgetary objectives and only slowly corrected excessive deficits,3
3322,in a few countries that still have high deficits the prospects for a sound budgetary position are not improving sufficiently,3
3323,in addition the twotier framework would take greater account of differences in the level of outstanding debt in determining the appropriate rate of fiscal adjustment,3
3324,however new vulnerabilities have emerged especially a broadbased deterioration in the fiscal positions in a number of noneuro area eu countries a number of which are currently under excessive deficit procedures,3
3325,third a number of other factors show up in an expansionary fiscal stance namely other discretionary measures unexpected revenue shortfalls eg,3
3326,this is why there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation,3
3327,ambitious benchmarks should be the basis when establishing the level of the excessive deficit and setting the adjustment path leading to a sound fiscal position,3
3328,thus a growth compact complements the fiscal compact because there can be no sustainable growth without orderly public finances,3
3329,discussions are emerging in several countries on ways to use the extra tax revenue obtained in the current recovery thus putting at risk public finances when the economy will slow down again,3
3330,the remit could include in particular major fiscal spending items and elements essential for the countrys competitiveness,3
3331,hence adjusting fiscal policies with a view to reaching certain deficit and debt targets largely neglects the existence of these hidden liabilities,3
3332,moreover budgets plans for 2005 were adopted before the pact reform so last years fiscal outcomes are not really a true yardstick,3
3333,research suggests that fiscal consolidations targeted at reductions in spending and government wage bill are likely to be more successful than consolidations based on tax increases,3
3334,on the fiscal side the reform of the stability and growth pact sgp and the new fiscal compact are specifically designed to detect and correct the fiscal imbalances at an early stage,3
3335,a move forward in the fiscal area perhaps even in the economic area would require a treaty change and so until we have that the rules have to be in place,3
3336,the fiscal support measures taken during the pandemic resulted in a sharp increase in public debt ratios which were already elevated before the pandemic started,3
3337,the explicit aim of the fiscal rules in place however is to contain government deficits and debt on an annual basis,3
3338,structural reforms are required in various areas as well as fiscal stimulus where budgetary flexibility exists,3
3339,now is the moment to have some additional investment cash not insist on cutting down budget deficits all the time,3
3340,10noy i  a nualsri 2011 fiscal storms public spending and revenues in the aftermath of natural disasters environment and development economics 1601 113128,3
3341,between 1999 and 2008 significant fiscal and broader macroeconomic imbalances appeared,3
3342,no significant progress has been made in fiscal consolidation and the outlook for countries with excessive deficits is a matter of great concern as there is a high risk of commitments for this year and the next not being met,3
3343,this enshrines balanced budget rules in national constitutions or equivalent under the vigilance of independent fiscal councils,3
3344,this could be complemented with enhanced national budgetary rules and procedures that are consistent with the eu fiscal framework,3
3345,most importantly the weak fiscal positions of many countries are placing severe constraints on the capacity of governments to  somehow  spend their way out of the crisis,3
3346,whereas the old pact merely stated that member states should maintain mediumterm budgetary positions that are close to balance or in surplus under the new pact each member state will present its own countryspecific mto,3
3347,first we should recognise the centrality of price stability for monetary policy,4
3348,this contradicts academic literature on the irrelevance of monetary policy operations,4
3349,this may not be a very important consideration at all times but it may become quite useful once the central bank faces a significant risk of hitting the zero bound on nominal interest rates and if the private sector is unsure about the likely monetary policy response under such conditions,4
3350,a third important building block for a credible monetary policy is to ensure that the operational framework makes it possible for the monetary policy decisions to be implemented efficiently,4
3351,mr duisenberg  well i dont believe that but then i would also say that for central banks which explicitly have other targets for example the bank of england which has an inflation target this does not mean that the bank of england or its monetary policy committee would not look at developments in the monetary aggregates as well as one of the indicators that might have some impact on their ultimate target,4
3352,in order to further enhance the transparency of its strategy and how it operates in practice the ecb reflecting its own learning process will gradually provide more information on how a variety of monetary policy indicators impinge on its monetary policy decision making,4
3353,the escbs stabilityoriented monetary policy strategy         the importance of the monetary policy strategy     with price stability clearly defined in this manner how should the escb proceed to maintain it,4
3354,5  the objective of increasing the effectiveness of monetary policy may be particularly important if the central bank has previously fallen behind the curve and waited too long before increasing interest rates,4
3355,in this respect we reiterated in our february decisions that within the governing councils mandate under stressed conditions flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability,4
3356,let me say that those principles are indeed present in the ecbs monetary policy strategy,4
3357,further shifts might be expected in response to the current rate hiking cycle,4
3358,2 it signals that the central bank will not tolerate a deanchoring of inflation expectations reducing the likelihood of such a deanchoring occurring,4
3359,by the same token the monetary policy strategy selected by the escb is not a variant of intermediate monetary targeting either,4
3360,i wish to emphasise however that interest rates will not be changed in a mechanistic way in order to react to deviations of monetary growth from the reference value in the short term,4
3361,it is crucial that shortterm interest rates reflect monetary policy decisions as precisely and in as stable a manner as possible,4
3362,i find from time to time statements suggesting that with its new monetary policy strategy the snb has essentially renounced its monetarist past,4
3363,the link between price stability interest rates and monetary policy implementation is conceptually simple  even if in practice very intricate,4
3364,the first main overriding principle on which preparatory work has been based is that the ecb will conduct the single monetary policy with a view to achieving its primary objective of maintaining price stability,4
3365,as the practical implementation of monetary policy decisions is an important link in the monetary policy chain we at the ecb lend much weight to the ways in which this is done,4
3366,but they have also triggered a lively debate on where to draw the line between crisisfighting efforts on the one hand  and a general departure from established principles of monetary policy on the other,4
3367,of course central bank independence is a sine qua non of effective monetary policy at all times and under all possible circumstances,4
3368,with regard to monetary strategy monetary and inflation targeting are seen as the two main benchmarks in the light of which the choice of the escbs strategy in stage three will be made,4
3369,13 increasingly the results of this research are being integrated into our regular assessment of monetary developments which is one source of input for our policy decisions,4
3370,under any monetary strategy the escb will also have to define price stability,4
3371,in february 2020 the ecb launched its ecb listens portal to gather feedback from the general public as part of its ongoing monetary policy strategy review,4
3372,conclusions let me conclude by summarising what are  in my view  the main features of a robust monetary policy framework,4
3373,this brings me to the  second risk  of unconventional monetary policy that it could in principle delays the very reforms that are necessary for monetary policy normalisation,4
3374,this makes it difficult for private agents to infer the future monetary policy path from past regularities,4
3375,central banks can cater for such risks in their monetary policy frameworks by acting with the same determination to downward and upward deviations from their inflation aims,4
3376,the european monetary institute emi and later the ecb were confronted with three possible let us say pure models of monetary policy strategy the exchange rate strategy the intermediate monetary targeting strategy and the direct inflation targeting strategy,4
3377,moreover to the extent that price stability has been firmly established the escb will implement its monetary policy with a view to supporting the realisation of other economic policy goals to the extent that this does not endanger future price stability,4
3378,in the coming months our measures will further ease the monetary policy stance more broadly support our forward guidance on the key ecb interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies,4
3379,on the basis of these and other data recent analyses by ecb staff members suggest that the transmission mechanism of monetary policy is normalising,4
3380,in calibrating our policy response to future challenges the ecb will remain deeply committed to our monetary policy framework,4
3381,policy challenges for achieving sustainable convergence         monetary policy strategy     you will not be surprised that being a central banker i will first focus on those aspects of the convergence process which relate to the conduct of monetary policy,4
3382,it is equally important to avoid isolation in the daily conduct of monetary policy,4
3383,i will argue that this improvement illustrates among other things the appropriateness of the monetary policy that we have undertaken in the past years,4
3384,striving for a high degree of transparency in monetary policy is widely acknowledged as a fundamental principle of efficient monetary policy,4
3385,the success of the monetary policy of the ecb should primarily be measured in terms of the maintenance of price stability not the accuracy of its conditional forecasts,4
3386,i will argue that given the exceptional accommodative monetary policy measures still in place and the growing risks of inflation settling above our target over the medium term continuing the process of policy normalisation that we started in december 2021 remains the appropriate course of action for monetary policy,4
3387,implications for inflation and monetary policy written for academic consultants meeting board of governors of the federal reserve system,4
3388,overall the lower rates will contribute to an appropriate monetary policy stance and thereby aim to ensure our objective of maintaining price stability,4
3389,the ecbs ongoing strategy review will ensure that its monetary policy strategy is fit for purpose both today and in the future,4
3390,hence at a broad level the ecb monetary policy strategy is not radically different from inflation targeting,4
3391,however this has to be a cautious process since one of the main functions of a monetary policy strategy is to provide a tool for clearly communicating monetary policy preparation and decisions,4
3392,mrs randzioplath this question we can also take for the subject number 4 if you dont mind because we wanted now to discuss monetary polices,4
3393,this applies to all instruments of our monetary policy stance,4
3394,moreover when explaining the general monetary policy strategy to the public the escb will make clear what the single monetary policy can and cannot achieve and how other areas of economic policies can support monetary policy and thereby enhance the benefits associated with price stability,4
3395,as a consequence the role of other community objectives in the monetary policy of the escb is conditional upon the achievement of the overriding target of price stability,4
3396,the ecb manages monetary policy in a systematic and transparent manner so that private agents are in the best possible conditions to gauge the likely evolution of interest rates in response to economic developments,4
3397,in particular as politicians cannot and should not be stopped from giving their views about monetary policy in public will the ecb adopt a reasoned approach in this respect which means that if politicians are right at some stage to call for a cut or rise in the interest rate the ecb  provided they agreed on the need for a cut  would not delay the cut or dismiss it purely to provide the appearance of independence,4
3398,the central question here is how a monetary authority profoundly committed to the objective to which it is mandated should incorporate in its rulebased behaviour past deviations of inflation from levels that it considers consistent with price stability,4
3399,34 for the purpose of setting a quantitative objective for monetary policy a price index should embody a number of essential properties,4
3400,woodford m 1999 optimal monetary policy inertia nber working paper nr,4
3401,in relation to the key policy rates since september 2019 the forward guidance linked future rate setting to the inflation outlook,4
3402,while the partial analysis embodied in pure theoretical models yields perhaps not surprisingly ambiguous results there are strong and well based a priori arguments for believing the best contribution that monetary policy can make to longterm output performance is to maintain a steady mediumterm price stability orientation,4
3403,if the first two cases were true some monetary policy action would be warranted,4
3404,in may 2003  as part of its review of the ecbs monetary policy strategy  the governing council of the ecb clarified its price stability objective explaining that in pursuing price stability it aims to maintain inflation rates below but close to 2 over the medium term,4
3405,dual mandates for monetary policy place this independence at risk,4
3406,if the deviation points to a threat to price stability monetary policy will react in a manner appropriate to counter this threat rather than attempt to eliminate the deviation of monetary growth from the reference value in the short term,4
3407,instead it should be seen as a realistic and balanced choice on how to present monetary policy decisions in a clear and consistent way,4
3408,and as a consequence policymakers are asking themselves if this should change the way they implement monetary policy,4
3409,to my mind it does not imply that the ultimate objective of monetary policy should not be price stability,4
3410,in that respect a thorough analysis of all relevant factors will be requested under all circumstances as well as a careful explanation of the escbs monetary policy action in the context of its monetary strategy,4
3411,with regard to monetary strategy monetary and inflation targeting are seen as the two benchmarks on the basis of which the escbs strategy in stage three will be selected,4
3412,for example some recent suggestions have gone to the extreme of advising monetary policy to target a higher rate of inflation than what central banks currently do so as to create more room for manoeuvre for monetary policy to react when bubbles burst without prematurely hitting the zero lower bound for interest rates,4
3413,but i will analyse it from the perspective of its implications for the chain of events on which monetary policy action depends,4
3414,in my opinion there are always good reasons to advocate a nonactivist monetary policy for the reasons i have attempted to explain above irrespective of the geographical size of the area to be covered and independently of the size of the monetary policy jurisdiction,4
3415,it also confirms how important it is for price stability to be the primary objective of monetary policy,4
3416,with regard to the nature of the policy decisions we took our monetary policy framework distinguishes between monetary policy decisions on the one hand and the implementation of the desired monetary policy stance through open market operations on the other,4
3417,this recognises that monetary policy cannot control price developments in the short term and should not therefore seek to do so,4
3418,30  should we judge that differences of this magnitude are likely to persist over the medium term they then become relevant for the appropriate calibration of our monetary policy stance,4
3419,the types of nonconventional operation implemented by the ecb fully allow us to amend the monetary policy stance in particular through a change in the interest rates,4
3420,the interest rate at which monetary policy becomes accommodative falls directly in line with the natural rate so the effective lower bound on nominal rates has become a much greater consideration when setting policy,4
3421,this statement in particular the formulation for an extended period of time marks a change in the ecbs communication of monetary policy,4
3422,the ecbs monetary policy strategy has some features that can become quite useful in this respect     first from the beginning the ecb has adopted a mediumterm orientation,4
3423,assessing price stability    i shall begin by assessing what can be considered the most natural goal of any monetary union the adoption of a credible monetary policy,4
3424,the central bank can directly influence only shortterm interest rates through its monetary policy instruments,4
3425,for this purpose monetary policymaking requires more than just the qualitative information that theory provides,4
3426,in other words and in general the transmission of changes in interest rates of monetary policy measures may change to a certain extent with the start of stage three of emu,4
3427,first an appropriate calibration of the monetary policy horizon,4
3428,lagarde c 2022 monetary policy in a high inflation environment commitment and clarity lecture organised by eesti pank 4 november,4
3429,as with our monetary policy tools we are closely monitoring the situation and we will review our approach on a regular basis,4
3430,in fact our monetary policy framework is more flexible than the aforementioned scenario of a rigid inflationtargeter suggests,4
3431,the role of inflation expectations in the ecb monetary policy strategy     let me now turn to the second topic i would like to address today namely the role of inflation expectations in the ecb monetary policy strategy,4
3432,so i would like to take this opportunity to explore some of the emerging evidence on the distributional effects of monetary policy,4
3433,the new keynesian model generated policy prescriptions which assigned the central bank the task of stabilising inflation and output developments at short horizons and in quite precise terms,4
3434,given the long and variable lags of monetary policy the strategic direction can only apply to the medium term,4
3435,a rich set of timely statistical data is a necessary but insufficient precondition for sound monetary policymaking,4
3436,when monetary policy decisions are made the general price development prospects  based on very careful analysis  will also be taken into account,4
3437,in addition we regard it as crucial that the continuous and systematic explanation of monetary policy decisions in the context of our strategy helps the public over time to understand and broadly anticipate how monetary policy reacts to observable data and indicators,4
3438,how can they support or constrain the conduct of monetary policy and its effectiveness in maintaining price stability and fostering growth,4
3439,that the stance of monetary policy does not depend only on the level of the nominal shortterm interest rate should be praised,4
3440,communication of monetary policy    although the formulation and implementation of the ecbs monetary policy have been a success the communication of our monetary policy intentions has sometimes proven more difficult than we had anticipated,4
3441,the statement that price stability has to be maintained over the medium term reflects the need for monetary policy to have a forwardlooking mediumterm orientation,4
3442,barro r and d gordon 1983 rules discretion and reputation in a model of monetary policy journal of monetary economics 12 101120,4
3443,contrary to models in the literature monetary policy is not constrained because we have reached the lower bound,4
3444,the fourth principle concerning the crucial role of expectations in the determination of inflation dynamics and in the transmission of monetary policy is also universally recognised and constitutes one of the key advances in the analytical foundations of monetary policy,4
3445,however they can also contribute more directly to support a stabilityoriented monetary policy by affecting the mechanism through which monetary policy decisions are transmitted to prices,4
3446,while there is still room for improvement which i will explain later on i feel confident that the ecb has now at its disposal a solid set of statistics of sufficient quality for the conduct of monetary policy,4
3447,this is because the escb will avoid signalling its monetary policy stance through these particular operations,4
3448,a monetary policy committee cannot credibly commit to keep interest rates low beyond its horizon of visibility,4
3449,this is the case for all monetary policies  indeed it is one of the channels through which monetary policy works,4
3450,predictability guarantees the efficiency of monetary policy,4
3451,as the ecb and others have demonstrated the lower bound for policy rates wherever it might be is not at zero,4
3452,even if policy interest rates reach their effective lower bound monetary policy does not run out of ammunition,4
3453,in my opinion the ecbs monetary policy strategy makes it possible to understand decisions whether passive ones not changing anything or active ones moving interest rates,4
3454,remember that it was only in 1994 that the federal reserve decided to make its interest rate decisions public,4
3455,there is also a fairly widespread consensus that to achieve this objective the central bank should formulate its monetary policy in a forwardlooking way with a view to executing it in a preemptive fashion,4
3456,the ecb was a new central bank operating in a very heterogeneous monetary union which created a particular imperative to establish inflation credibility,4
3457,all in all the new stabilityoriented monetary policy strategy of the escb is designed to avoid giving the impression that monetary policy responds mechanistically to deviations from a single target or the evolution of a specific variable,4
3458,and this is why we have emphasised all along that flexibility is integral to the process of normalising our monetary policy,4
3459,11  the outlook for monetary policy so what is the role of monetary policy in this response,4
3460,such a change would have significant implications for the conduct of monetary policy,4
3461,in fact when talking about unorthodox monetary policy we have to clearly distinguish between two different dimensions of monetary policy the objective and the instruments,4
3462,communication and language    from what i have said so far the ecbs monetary policy strategy can be characterised as a transparent description of how we set about our mandate of maintaining price stability,4
3463,our monetary policy strategy is rendering us very valuable services in this respect,4
3464,in short the effective lower bound on interest rates has become a feature of our monetary policy,4
3465,second in terms of the conduct but also the communication of monetary policy the central bank should make it clear that monetary policy is geared towards achieving price stability over the medium term and that it will take all actions necessary to deliver price stability over that horizon,4
3466,remember when alan greenspan was puzzled by low real longterm interest rates persisting even after the federal reserve system started raising policy rates in june 2004,4
3467,as it turns out the literature says little about how monetary policy drives the reform process,4
3468,in this setting one way to engineer a looser monetary stance is to act on expectations of future rates by signalling that policy rates will remain low for a long time,4
3469,the new monetary policy strategy also contains a general commitment to base monetary policy decisions including the evaluation of the proportionality of its decisions and potential side effects on an integrated assessment of all relevant factors,4
3470,the single monetary policy strategy and implementation    i will examine these issues by focusing first on the single monetary policy,4
3471,the ecbs definition of price stability  as i have emphasised above the basis for our strategy is our mandate from the treaty to maintain price stability as the primary objective of monetary policy,4
3472,indeed such a simplistic approach to monetary policy making is unwise in all circumstances,4
3473,the ecb strategy makes the primary objective of price stability operational through the mediumterm orientation of monetary policy,4
3474,first of all our experience is that the decisionmaking process and the practical implementation of the single monetary policy have worked very well  and even exceeded our expectations,4
3475,the second aspect is the centrality of price stability for monetary policy,4
3476,a monetary policy strategy should not be seen as a machine that automatically delivers decisions,4
3477,overall i am confident that the clarifications provided will foster understanding of the monetary policy of the ecb,4
3478,each one of these two principles  if taken individually  entails some guidance for the monetary policymaker which however is partial,4
3479,against this background the escb will have to design a monetary policy strategy of its own,4
3480,2 the monetary policy function of the central bank requires that it maintains a high level of credibility and reputation since it is essential to keep expectations of rising inflation at bay,4
3481,against this background the ecbs forward guidance follows two concrete objectives first to curb interest rate volatility over the policyrelevant horizon and second to anchor rate expectations more firmly around a path that ensures the degree of monetary accommodation warranted by the outlook for price stability,4
3482,other watchers argue for the adoption of monetary targeting with interest rate geared to achieving a certain rate of money growth,4
3483,this thorough analysis cannot be subsumed into a meaningful summary statistic or single number to which monetary policy will react in a mechanical way,4
3484,we will compare actual developments with the reference value and then come to a judgement and only a partial judgement because we look at a lot of other things in the second pillar as well and then come to a judgement whether or not this deviation of actual developments from the reference value gives us cause to change anything in monetary policy,4
3485,finally i would very strongly stress that it is of paramount importance for a central bank to ensure that inflation expectations remain wellanchored,4
3486,41 now monetary policy increasingly has to use unconventional policies to achieve its mandate and to do so for longer and with more intensity,4
3487,139233 and more recently in m woodford methods of policy accommodation at the interestrate lower bound paper presented at the jackson hole economic policy symposium of the federal reserve bank of kansas city the changing policy landscape august 31  september 1 2012,4
3488,however changing the inflation objective at a time when outcomes have been below the current objective for a number of years risks damaging central banks credibility,4
3489,first    monetary policy should always remain resolutely focused on achieving and maintaining price stability   milton friedman famously remarked that inflation is always and everywhere a monetary phenomenon,4
3490,it is therefore appropriate not to ignore the conclusions of theory and the lessons of past experience when discussing the objectives of monetary policy,4
3491,likewise our twopillar monetary policy strategy is intended to guarantee that no piece of evidence relevant to monetary policy decisionmaking is excluded from the governing councils information set,4
3492,indeed if we hold a sceptical view of monetary policy coordination we should favour stronger cooperation in some other policy areas,4
3493,elements of a monetary policy strategy let me first briefly expand on the distinction between the different elements of a monetary policy strategy,4
3494,first the exit from the negative interest rate policy may have strengthened the transmission of a rate hike throughout the term structure of interest rates,4
3495,the literature on policy rules suggests that in reacting central banks should adhere to the taylor principle which requires that the nominal interest rate respond to the inflation rate by more than one for one,4
3496,i will add to his comments by considering how our monetary policy framework  which has served us well  will be of great help in timing the exit correctly,4
3497,let me make a remark in this context linked to comments which arise with a certain regularity in public debate and which argue that monetary policy should follow a different orientation an orientation in which price stability is not the overriding objective,4
3498,having said that i would like to stress that the ecbs monetary policy is firmly geared towards its primary objective of preserving price stability,4
3499,the transmission of monetary policy in these models depends not only on nominal rigidities governed by the frequency of price changes and the selection effect but also on whether a change in the policy rate triggers large or small price adjustments,4
3500,the success of monetary policy at the ecb depends on our ability to take into account  in our economic and monetary analysis  this rapidly changing environment,4
3501,this means that we need to also rely on other sources of information to ensure that we conduct a robust monetary policy,4
3502,assigning a prominent role to money guarantees that the fundamentally monetary origins of inflation will not be neglected in the analysis driving monetary policy decisions,4
3503,these new statistics will significantly improve the analysis of the monetary policy transmission mechanism resulting from changes in key ecb interest rates,4
3504,however in deciding how to adjust the policy stance in order to achieve this goal conferring persistence on the policy rate may be desirable to the extent that this maintains and strengthens transmission,4
3505,to an extent monetary policy always works through a redistribution of activity,4
3506,svensson l 2015 monetary policy and macroprudential policy different and separate federal reserve bank of bostons 59th annual conference revised march 2018 canadian journal of economics forthcoming,4
3507,there is a very interesting chapter in the october bulletin from the ecb about inflation differentials and monetary union,4
3508,the single monetary policy is by its very nature indivisible,4
3509,however it is facilitated by two fundamental components of the ecbs monetary policy strategy,4
3510,let me close my remarks this morning  which i repeat have no bearing on current monetary policy matters  by recalling that in economic and monetary union we share a common destiny,4
3511,overall the point that i have made earlier for monetary policy also holds for other policy areas there is no reason for complacency,4
3512,in my contribution today i will emphasise that the ecb conducts monetary policy as usual,4
3513,in this respect understanding the transmission mechanism of monetary policy is crucial,4
3514,why did some members of the ecb governing council advocate 25 basis points up and the others 50 basis points up which leads us to assume there will be another hike in interest rates before summer,4
3515,changes in the level of the current policy rate always have an intrinsic signalling content with respect to possible changes for shortterm rates in the future,4
3516,this allows central banks to better infer the appropriate path of the policy interest rate,4
3517,i also believe that monetary policy still has tools effective enough to achieve the unaltered goal of price stability,4
3518,monetary policy in a low inflation environment speech at the barclays international monetary policy forum london 27 february,4
3519,it is our view that the current monetary policy stance will contribute to achieving our primary objective of maintaining price stability in the medium term,4
3520,so a successful normalisation process requires other policies to be consistent with monetary policy,4
3521,our monetary policy has therefore evolved in line with the outlook for price stability and in a consistent manner over time,4
3522,this is close to inflation targeting regimes of central banks with a dual mandate but with primordial importance given to inflation as the variable in relation to which monetary policy is more efficient,4
3523,i explained earlier at length the ecbs monetary policy stance in order to fulfil its objective of preserving price stability,4
3524,there is a wide consensus that price stability should be the main objective of monetary policy,4
3525,this is because the ecb will avoid signalling its monetary policy stance through these particular operations,4
3526,one feature of an analytical framework in which money plays no meaningful role and of a policy strategy in which the policyrate is set without taking into account monetary developments is the possibility that the central bank may fail to anchor inflation expectations effectively,4
3527,in the same vein any significant change of the monetary policy strategy such as a change of the key monetary aggregate soon after the start of monetary union could have seriously hampered the ecbs credibility,4
3528,this is why the concept of neutral and long term equilibrium interest rates while appealing in theory are very difficult to use in practice for the implementation of monetary policy,4
3529,the ecbs monetary policy strategy provides the framework for such an analysis,4
3530,obviously these forces have important implications for monetary policy,4
3531,this means monetary policy works largely by affecting expectations of future policy interest rates  this is true both at and away from the effective lower bound,4
3532,doing so shows the capacity of our policy framework to provide the monetary accommodation required to return inflation to the mediumterm goal even when the policy rate is no longer in conventional positive territory,4
3533,let me now turn to the subject of my lecture namely making monetary policy in a broad monetary union,4
3534,2006 the expectations hypothesis of the term structure when interest rates are close to zero journal of monetary economics 53 pp,4
3535,let me now turn to our current assessment of the monetary policy stance,4
3536,16see brunnermeier m and y koby the reversal rate effective lower bound on monetary policy presented at the bis research network meeting 14 march 2016,4
3537,this is because monetary policy is only providing stimulus if the shortterm policy rate  adjusted for inflation  is below the equilibrium rate,4
3538,the eu treaty and the ecb statute clearly state that the primary objective of monetary policy is to maintain price stability,4
3539,remark 2 at the lower bound monetary policy has remained effective via nonstandard measures,4
3540,at the ecb we are actively working on these issues to ensure that our monetary policy continues to be conducted in an effective way also in the new environment so as to maintain price stability our primary goal,4
3541,nevertheless the escbs monetary policy strategy must be clear and transparent if we are to convince the public of our commitment to maintaining price stability and our ability to do so,4
3542,but that is not a structural issue it is about the credibility of monetary policy in anchoring inflation expectations,4
3543,let me now turn to the characterising elements of the ecb monetary policy strategy,4
3544,it is precisely this which the ecb is determined to counteract with its forwardlooking monetary policy,4
3545,while policy rates remain our main instrument for steering monetary policy we have made clear that we are ready to adjust all our instruments to maintain the consistency we need in our monetary policy to achieve our primary objective of price stability,4
3546,to me the success of our policy and the high predictability of our policy decisions12 suggest that we have probably been able to communicate our monetary policy strategy and within that strategy the role of the monetary analysis in a reasonably efficient way,4
3547,our monetary analysis gives a picture consistent with price stability over the medium term,4
3548,only if the information is structured and analysed in a consistent way will monetary policy makers be in a position to take the most appropriate decisions to obtain their policy goals,4
3549,it is important to recognise the role of the definition of price stability in the conduct of monetary policy,4
3550,how would it impact monetary policy transmission and what would it mean for nonstandard monetary policy measures,4
3551,where monetary policy is concerned this includes the reaffirmation by the governing council of its forward guidance through which the planning security of market participants was increased by indicating that we continue to believe that the ecbs policy interest rates will remain at their current or a lower level for a longer period of time,4
3552,by maintaining price stability over the medium term the appropriate forwardlooking and mediumterm orientation is imparted to monetary policy,4
3553,that will be the case of the ecb as we have already said that anyhow monetary policy will continue to be very accommodative until we achieve our goals,4
3554,14  can such a development pose a threat to the conduct of monetary policy,4
3555,economic and monetary developments  let me first briefly discuss our recent monetary policy decisions,4
3556,the ecbs monetary policy strategy    this brings me to the second cornerstone of the single monetary policy in emu the ecbs stabilityoriented monetary policy strategy which provides a comprehensive and clear framework for the conduct and communication of our policy,4
3557,the monetary policy transmission mechanism the desirability of flexible inflation targeting was established using the canonical new keynesian model,4
3558,if a central bank cuts its policy rate to zero but excludes moving into negative territory the distribution of expectations of future interest rates becomes skewed,4
3559,the primary objective of the ecb is to preserve price stability and the conduct of the single monetary policy is geared towards achieving this goal,4
3560,and let me make this very clear the triangle does not include monetary policy,4
3561,that is how our monetary policy should be judged whether in the medium term we reach this objective,4
3562,  summary   the monetary policy experience of the past seven years is reviewed,4
3563,the mediumterm orientation of the ecbs monetary policy    the ecbs monetary policy strategy also makes clear that price stability is to be maintained over the medium term,4
3564,however we also need to adjust the ecbs monetary policy toolkit to ensure it can fulfil its role,4
3565,the role of the escb will be to implement the single monetary policy with a view to achieving the overriding objective of maintaining price stability,4
3566,rugemurcia francisco 2006 the expectations hypothesis of the term structure when interest rates are close to zero journal of monetary economics elsevier vol,4
3567,if the last interpretation were true however the monetary policy implications would be different possibly opposite,4
3568,overall the ecb looks back over the first years of the single monetary policy with satisfaction,4
3569,judging by the opinion of a majority of central bank governors and academics54 the prediction is that monetary policy will try to keep the flexible inflation targeting regime coupled hopefully with some form of macroprudential policy,4
3570,in this respect as mervin king 2005 has put it the real influence of monetary policy is less the effect of any individual monthly decision on interest rates and more the ability of the framework of policy to condition inflation expectations,4
3571,the effectiveness of the ecbs interest rate decisions is reflected in the continued credibility of the ecbs monetary policy,4
3572,on the basis of the available evidence i think that the ecb is being rather cautious in the way it has chosen to employ money in its monetary policy strategy,4
3573,i will discuss their interaction with monetary policy and the conduct of that policy and draw some tentative conclusions about how they reinforce each other  and where i see possible problems,4
3574,thus you cannot change your monetary policy strategy as you would change suits,4
3575,second nonconventional measures may be warranted even when the policy interest rate is above zero if the monetary policy transmission process is significantly impaired,4
3576,lessons for monetary policy    my remarks thus far have illustrated how our monetary policy framework has enabled us to address the challenges that emerged in the past thirteen months,4
3577,i cannot overemphasise the latters importance for the successful pursuit of monetary policy,4
3578,a high degree of continuity has been maintained as our results support the monetary policy strategy,4
3579,3 note that the central bank cannot affect the equilibrium real rate,4
3580,however it is important to remember that the monetary policy never reacts to the latest data but should always aim at an assessment of developments one to two years ahead,4
3581,and these findings hold even under the assumption that monetary policy is constrained,4
3582,in line with its new monetary policy strategy it should be clear that the ecb will set its monetary policy to deliver its symmetric two per cent target over the medium term tolerating neither overreactions nor underreactions to emerging inflation risks,4
3583,so under current conditions our indications regarding the most likely evolution of the policy rates are a key instrument for setting the monetary policy stance,4
3584,the question is therefore how to treat more or less equally plausible models in particular when they imply differences concerning the appropriate stance of current monetary policy,4
3585,before making any alterations to the components of our stance  interest rates asset purchases and forward guidance  we still need to build sufficient confidence that inflation will indeed converge to our aim over a mediumterm horizon and will remain there even in less supportive monetary policy conditions,4
3586,changes in monetary policy strategy have very different implications depending on which of these two constituent elements  policy objectives or policy conduct  they affect,4
3587,others would even prefer the strategy to be replaced by the adoption of a policy rule determining the monetary policy stance as an explicit function of some variables or by an even simpler rule relating to an intermediate target,4
3588,the touchstone of a good monetary policy strategy is how clear and predictable the socalled reaction function of monetary policy is,4
3589,under our secondary mandate the ecb has the obligation  indicated by the legal term shall  to align its monetary policy measures with the general economic policies of the eu as long as this does not prejudice our price stability objective chart 9,4
3590,while this topic is also an important element of the ecbs ongoing monetary policy strategy review my remarks should not be seen as an indication of its eventual outcome,4
3591,the conduct of monetary policy    what does all this imply for the ecbs choice of monetary policy strategy and the conduct of its single monetary policy,4
3592,fourth monetary policy should focus on its primary objective of price stability both before and after erm ii entry,4
3593,my disagreement is rooted in the way the very concept of a monetary policy strategy should be understood,4
3594,by constantly reminding the central bank that in the long run prices and money stock increases are correlated the monetary pillar is a standing support to the ecbs commitment to price stability at all horizons that are relevant for economic decisions,4
3595,and this cannot be ignored when formulating monetary policy,4
3596,nevertheless i will try to make a first qualitative assessment of the experience gained thus far in the conduct of a single monetary policy,4
3597,this objective in turn contributes to the primary monetary policy objective of maintaining price stability6,4
3598,to underline the medium to longterm orientation of the analyses under its monetary pillar the ecb has always emphasised the fact that there would be no strict link between shortterm monetary developments and monetary policy decisions,4
3599,over time we have seen a significant improvement in public understanding of our communication of our monetary policy strategy and our monetary policy decisions,4
3600,the prominent role assigned to money as the first pillar of our strategy ensures that monetary developments are never lost from sight and are attributed the appropriate role that they deserve given the monetary nature of inflation beyond the immediate horizon,4
3601,in the second scenario the monetary policy rate is raised in the spirit of leaning against the wind,4
3602,from a purely monetary policy point of view it is entirely consistent to aim at negative rates when the real interest rate has itself turned negative,4
3603,i wish to emphasise that these remarks of mine should not be interpreted as specific indicators of the direction of the ecbs monetary policy in the coming weeks and months,4
3604,at its last monetary policy meeting on 10 april the ecb governing council confirmed that it continues to expect the key ecb interest rates to remain at their present levels at least through the end of 2019 and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below but close to 2 over the medium term,4
3605,forward guidance since june 2013 the ecb has been providing forward guidance on the future path of the monetary policy interest rates conditional on the outlook for price stability,4
3606,we will take our findings into account when reviewing the reference value and taking monetary policy decisions,4
3607,the ecbs monetary policy places particular emphasis on the need to take all relevant information and models into account when formulating policy decisions,4
3608,i do not see any advantage in keeping a different monetary policy from that of the partners of the single market provided that the common monetary policy is directed towards the same objective ie,4
3609,as a consequence changes in our main policy rates have had uneven effects across countries thus undermining the singleness of monetary policy,4
3610,it is also reflected in the recent decision by the federal reserve to release fomc participants projections of the appropriate level of the target of the federal funds rate including the likely timing of the first increase in the target rate 13,4
3611,any such attempt would overburden monetary policy,4
3612,this dimension of the ecbs monetary policy strategy is not always appreciated but is important,4
3613,by following a transparent approach the central bank can directly improve the efficiency of monetary policy,4
3614,a third key factor behind a successful monetary policy is the ecbs monetary policy strategy and the communication of its policy to the public,4
3615,the first is a shortterm interest rate shock which would arise primarily in the context of the ecb adjusting its main policy rates,4
3616,analysis under the second pillar is intended to reveal this information giving policymakers greater insight into shorterrun price dynamics and their implications for monetary policy,4
3617,it should allow signals of monetary policy intentions to be given with precision and differentiation,4
3618,an answer to the question of the relevance of the monetary pillar for monetary policy cannot be found by looking at the simple correlation of broad monetary aggregates with policy rates,4
3619,this is true in particular of two crucial elements of our monetary policy concept the focus on price stability as the primary objective of monetary policy and the need to provide the public with a clear framework for the assessment and communication of the risks to price stability,4
3620,within the stabilityoriented framework of monetary policy the ecb is committed to its primary objective of maintaining price stability over the medium term,4
3621,let me stress solemnly that our monetary policy stance is itself designed to deliver price stability over the medium term,4
3622,i would argue that the principles of sound monetary policy remain largely unchanged,4
3623,therefore let me now briefly focus on the last link in the monetary policy chain that i am describing today namely the monetary policy transmission mechanism,4
3624,hetzel r 2000 the taylor rule is it a useful guide to understanding monetary policy economic quarterly 86 pp,4
3625,21  greening monetary policy implementation so the implications for the conduct of monetary policy could be substantial,4
3626,increasing the numerical definition of price stability let me now turn to the discussion of innovative ideas on strategic aspects of monetary policy,4
3627,as you know over the last two years the ecb has taken a series of monetary policy measures to ensure that we meet our price stability mandate,4
3628,although the monetary data contain information vital to informed monetary policymaking on their own they will not normally constitute a complete summary of all the economic information required to set an appropriate monetary policy for the maintenance of price stability,4
3629,this has proved an unfortunate distraction from the real question how should monetary analysis be undertaken in order to provide the best support for monetary policy decisions,4
3630,the monetary policy framework announcement sparked a lively debate in the academic community regarding the differences between the ecb approach and the inflation targeting regime,4
3631,  monetary policy  end of history,4
3632,monetary policy and price stability    the first eight years of emu confirm that the choice to assign monetary policy one primary objective  price stability  has been correct,4
3633,in particular the monetary analysis helps us to obtain a robust assessment of the balance of risks to price stability and ultimately to adopt the monetary policy stance that is appropriate in order to fulfil our mandate,4
3634,they are of course an important piece of information which is taken into account but they are not the sole basis for our monetary policy decisions,4
3635,the message of such a signalling rate from the perspective of a central bank is that shortterm interest rates should not deviate too much from the signalled rate,4
3636,furthermore it does not in any way change the ecbs monetary policy strategy,4
3637,in line with the argument of a closer relationship between money and inflation at lower frequencies the function ascribed to the monetary pillar is to reveal mediumterm risks to price stability underpinning the mediumterm orientation of the monetary policy strategy,4
3638,this literature has stressed the management of inflation expectations as a crucial monetary policy channel and the importance of central bank credibility,4
3639,keeping a firm sense of direction   but how can a monetary policy framework induce prompt action in the face of ever changing circumstances and at the same time maintain a firm sense of direction,4
3640,as in the monetary policy field we need strong monitoring to support good policymaking,4
3641,i believe i do not need to explain in any detail to such a knowledgeable audience why we at the ecb insist that the best contribution monetary policy can make to growth is to maintain price stability,4
3642,monetary developments did not stand in the way the lowering our interest rates by a quarter per cent based on other considerations contained in the second pillar of our monetary policy,4
3643,this is not so much a question of monetary policy coordination as a question of the coordination of other policies to be consistent with monetary policy the maastricht treaty enshrines the principle of monetary dominance,4
3644,the successive chairmen of the fed have made clear that the fed considers price stability not only as a goal but also as a means for the fed policy to achieve its other statutory goals,4
3645,the comparison of two central banks    let me finally explain how i see our european monetary policy concept in comparison with the us federal reserve monetary policy concept,4
3646,duisenberg   well we have onesizefitsall monetary policy and if the question is does that cause any difficulties in formulating the monetary policy then the answer is no,4
3647,let me turn to the monetary policy strategy of the ecb,4
3648,challenges for monetary policy the current situation also highlights the much broader challenges that monetary policy is facing today and that we will be discussing as part of our ongoing monetary policy strategy review,4
3649,but such measures clearly have the potential to influence monetary dynamics and monetary policy,4
3650,nonetheless it is important to keep in mind the distinction between what monetary policy can and should do and what is the domain of macroprudential policy,4
3651,indeed monetary policy in stage three started with very low interest rates by historical standards,4
3652,in order to firmly anchor inflation expectations at 2 the federal reserve has announced that it aims to achieve inflation moderately above 2 for some time  a strategy which reflects the fact that when the phillips curve is flat anchoring inflation expectations matters even more,4
3653,mediumterm orientation the medium term orientation is based on the wellestablished fact that long and variable lags characterise the transmission of monetary policy decisions,4
3654,this materially increases the likelihood that central bank policy runs into the constraint set by the effective lower bound for interest rates which is not far below zero,4
3655,finally and provided that the answers to the previous questions lead to the conclusion that monetary policy can indeed play a stabilising role a number of important practical issues must be addressed as regards how monetary policy can best contribute to reducing cyclical fluctuations should it be conducted in a discretionary way or on the basis of a welldefined and publicly announced strategy and policy rules,4
3656,the anchoring of inflation expectations is a very important benchmark for assessing whether the stance of monetary policy has become too expansionary and whether there are risks of falling behind the curve,4
3657,maintaining the risk management principles while returning to a more conventional monetary policy  it is clear that once we have seen a sufficiently sustained adjustment in the path of inflation we will continue to prudently adjust our toolbox of monetary policy instruments as we have been doing since december last year,4
3658,maintaining credibility for the conduct of monetary policy    a second guiding principle for monetary policy conduct is that a central bank cannot ignore the promises  implicit or explicit  made in the past when designing present policy,4
3659,the monetary policy objective of a central bank should always be the overriding concern and guiding principle of any policy action,4
3660,12 certainly as i will argue shortly the ecb would not have maintained the nominal and real policy rate at the low levels at which they were held for more than two years without consistent signs that expectations were wellanchored and inflationary shocks were being quickly reabsorbed,4
3661,let me therefore dedicate most of the remainder of this speech to our nonstandard monetary policy and how it relates to standard interest rate policy,4
3662,10  for central banks these findings highlight the importance of communicating our monetary policy objectives effectively  an important consideration in our strategy review and in our decision to adopt a symmetric inflation target of 2 over the medium term,4
3663,last but not least i would like to mention the single monetary policy which has preserved price stability and credibility in a transparent manner,4
3664,how does technological change affect the monetary transmission mechanism and monetary policy,4
3665,this leads me to the second dimension of discussion of the limitations of monetary policy namely the risk of a blurring of the boundaries of central bank policy,4
3666,the monetary policy strategy in stage three   you are aware of the fact that the primary objective of the single monetary policy as laid down in the treaty is to maintain price stability,4
3667,a central bank can never simply steer monetary policy as the result of a calculation the final stage of an algorithm or the functioning of a mechanism,4
3668,one monetary policy response to interaction or an outcome resulting from it is standardisation,4
3669,these factors have constrained conventional monetary policy space and required a profound expansion of the policy toolbox in order to ensure the effectiveness of monetary policy,4
3670,let me highlight the following    the emi published a report on monetary policy strategy in february 1997 identifying two potential strategies for stage three intermediate monetary targeting and direct inflation targeting,4
3671,the key questions are what is the correct hypothesis for the conduct of monetary policy,4
3672,and this can change the way society perceives the basic parameters of the monetary policy framework,4
3673,initially this wasnt a new path either but standard practice for monetary policy,4
3674,rather the monetary analysis helps to identify longer term risks to price stability and supports thus the medium term orientation of monetary policy,4
3675,however the fact that it is a reference value and not a monetary policy target implies that monetary policy will not react in a mechanistic way to shortterm deviations from this level,4
3676,for some this may seem like an unusual combination of topics as it is often argued that monetary policy has no longrun effects,4
3677,another possibility would be to pursue a more sophisticated tilting strategy under which the ecb could adjust its monetary policy operations more gradually in line with sustainability considerations,4
3678,concluding remarks    to conclude i would like to make three remarks first the design of the operational framework is an important component of successful monetary policy,4
3679,third international experience has shown that a publication of minutes will not necessarily contribute to the efficiency of the monetary policy  which means price stability at lowest possible interest rate  and to a better understanding of the monetary policy decisions,4
3680,consequently monetary developments can reveal useful information about future price developments and thereby offer an important compass for the conduct of monetary policy,4
3681,thus there tends to be a significant gap between any simple stylised monetary policy rule and monetary policy strategies pursued in practice,4
3682,let me finally mention that our recent interest rate cuts were fully in line with our monetary policy strategy,4
3683,the main objective of monetary policy should be price stability,4
3684,in its extreme theoretical variant monetary targeting would involve the central bank choosing a monetary aggregate as its intermediate target and deciding on its monetary policy actions on the sole basis of comparisons between the target and actual monetary developments,4
3685,5 see constâncio v 2017 the future of monetary policy frameworks,4
3686,5  interest rates are and will remain the main tool for adjusting our policy stance,4
3687,this is why the ecb adopted many nonstandard measures aimed at strengthening monetary policy transmission at a time when interest rates were still far away from the effective lower bound,4
3688,the specific way in which the ecb should pursue this primary objective is laid down by what is called the monetary policy strategy,4
3689,in my remarks today i therefore plan to focus on the conduct of monetary policy when inflation is below target and explain why the ecb is maintaining an accommodative monetary policy stance,4
3690,i will first very briefly review the economic and monetary developments over the past year and explain our monetary policy decisions,4
3691,15 the results indicate that this heterogeneity does play a role in shaping the transmission of monetary policy,4
3692,1999 inflation targeting as a monetary policy rule journal of monetary economics 43 607 654,4
3693,firstly monetary policy has only one instrument available interest rates,4
3694,i have said in my introduction also that we regard and continue to regard the current monetary policy stance as appropriate for the circumstances also for the foreseeable future,4
3695,the elements of the ecbs strategy        21 the objective of price stability    the basis for the strategy is the ecbs mandate that the primary objective of monetary policy should be to maintain price stability,4
3696,more recently it has focused on the recognition that a predictable and systematic monetary policy should stabilise expectations over time,4
3697,the maintenance of price stability over the medium term guides all monetary policy decisions,4
3698,i am confident that the single monetary policy will make the greatest possible contribution in this regard,4
3699,at the ecb the ongoing review of our monetary policy strategy creates an opportunity to reflect on how to address sustainability considerations within our monetary policy framework,4
3700,the second challenge for monetary policy communication is to take into account the increasing complexity of monetary policy by ensuring consistency over time and clarifying the state contingency of the policy stance,4
3701,our forward guidance on interest rates which makes the evolution of our policy rates contingent on the robust convergence of inflation to our aim captures our monetary reaction function in the current environment of low inflation and low interest rates,4
3702,it helps the decisionmakers to set monetary policy independently of the political cycle,4
3703,they also broadly share the view that the best contribution that monetary policy can give to the efficient functioning of monetary economies is to ensure price stability,4
3704,this is fundamental to the conduct of a truly single monetary policy,4
3705,although the work has not yet been concluded i wish to emphasise that the progress made has been considerable and that we now have the basic statistical information required for our monetary policy strategy and for taking appropriate decisions,4
3706,however the longer interest rates are held at a low level below the equilibrium level the greater the need for a quick tightening to reverse the course and bring the policy back in line,4
3707,in theory monetary policy should track the equilibrium real interest rate,4
3708,the prominent role assigned to money as the first pillar of our strategy ensures that monetary developments receive the attention that they deserve given the monetary nature of inflation beyond the shortterm horizon,4
3709,are low or even negative rates a permanent feature of monetary policy,4
3710,finally let me turn to the last of the three questions on monetary policy loosening when to stop,4
3711,monetary policy in a low inflation environment speech at the barclays international monetary policy forum,4
3712,the forwardlooking mediumterm orientation of the strategy also makes it possible to be proactive in monetary policymaking,4
3713,6 and in the context of our strategy review we will discuss whether sustainability considerations could be reflected in our monetary policy operations,4
3714,first it has significantly eased the monetary policy stance,4
3715,at least to me this implies that we will never find definitive answers to the questions surrounding the design and implementation of monetary policy,4
3716,the conduct of monetary policy in pursuit of price stability must be insulated from such pressures,4
3717,10  in practice we observe that monetary policy easing tends to be quicker and more decisive than tightening,4
3718,in monetary policy terms the ecb has a clear assignment to deliver price stability,4
3719,assigning a prominent role to money in the overall stabilityoriented monetary policy emphasises the responsibility of the escb for the monetary impulses to inflation which a central bank can control more readily than inflation itself,4
3720,1 see emi 1997 the single monetary policy in stage three elements of the monetary policy strategy,4
3721,the ecb will continue to address governments and other policymakers convinced as we are that monetary policy does not act in a vacuum and that the task of maintaining price stability is much easier in a flexible and competitive economy,4
3722,on this point let me add that given those difficulties the ecb monetary policy strategy is transparent in openly acknowledging these difficulties,4
3723,in my remarks today i will discuss how recent research including that presented here helps us to understand the transmission of our monetary policy,4
3724,however we have not gone beyond the goal of reestablishing a more correct transmission of our monetary policy,4
3725,the pepp complies with the proportionality principle as it is both suitable and necessary to attain the monetary policy objective,4
3726,at the ecb our decisionmaking is guided by our new monetary policy strategy as demonstrated by the revision of our interest rate forward guidance that we decided in july,4
3727,mr hendrick  i would like to address the question of transparency with regard to the monetary policy strategy itself,4
3728,in my remarks however i will argue that while the effective lower bound for shortterm rates exists it does not in fact impose a binding constraint on the effectiveness of monetary policy,4
3729,after all reinforcing trust in our institution also supports our monetary policy for example by anchoring inflation expectations,4
3730,in no way the introduction of an explicit numerical objective for inflation did therefore radically alter its monetary policy framework rather by providing a focal point for inflation expectations the only goal of such innovation was to improve the frameworks performance and to facilitate the central banks task within the framework,4
3731,33 strategy and instruments for the conduct of the single monetary policy  the emi has published material in which it recommends two possible monetary policy strategies for the ecb to consider monetary targeting and direct inflation targeting,4
3732,on this point we have been very clear the current constellation of policy rates is for us the effective lower bound,4
3733,the horizon of monetary policy is stretchable but it is not infinite,4
3734,there are several reasons why such rules are not used in the practice of monetary policy,4
3735,consistency means that we are faithful to our mandate and seek to deliver the monetary policy stance that given the prevailing economic conditions maximises our chances of attaining our objective over the policyrelevant horizon,4
3736,this together with further analysis of the monetary data signals that monetary developments are consistent with the maintenance of price stability over the medium term,4
3737,but with rates now moving into restrictive territory it is the extent and duration of monetary policy restriction that matters,4
3738,these remarks are in my view sufficient arguments in favour of a nonactivist monetary policy because not being active in terms of frequency of monetary policy changes means that we avoid missing the right moment to act and not being sensitive to regional differences means that monetary policy can meet the monetary requirements of the area as a whole,4
3739,in fact our monetary policy always aims to respect the definition of price stability,4
3740,they can provide the signal that the monetary policy stance needs to be tighter well before the business cycle reaches its peak in order to ensure price stability over the medium term,4
3741,first it needed to signal clearly its monetary policy intentions,4
3742,the effectiveness with which monetary policy can attain and maintain price stability depends on various factors pertaining to the way monetary policy is formulated and conducted,4
3743,this development has allowed monetary policy freedom to pursue its own purposes,4
3744,concluding remarks in conclusion what are the main lessons from recent experience that we should seek to incorporate in any revision to the framework for monetary policymaking,4
3745,15 i maintained that central bank independence could best be described as independence in interdependence since monetary policy can always achieve its objective eventually but it will do so faster and with less collateral effects if the overall policy mix is consistent,4
3746,credibility can be enhanced by the transparency of the monetary policy strategy  whichever strategy the escb will finally adopt  and by a policy which leaves no doubt regarding its determination to keep prices stable,4
3747,second conditionality enhances the independence and the effectiveness of our monetary policy,4
3748,the extra information should be useful for calibrating monetary policy,4
3749,the sine qua non for this is to build monetary policy decisions into a systematic and predictable strategy based on price stability which drives expectations and guides the economy but doesnt shock it,4
3750,a second key factor behind a successful monetary policy is the macroeconomic policy framework laid down in the treaty,4
3751,monetary policy is most effective when it is credible that is when the public is convinced that monetary policy will successfully maintain price stability over the medium term,4
3752,in the conduct of our monetary policy we are aiming at achieving mediumterm price stability with interest rates which are always consistent with this stability,4
3753,this could be a good argument in favour of using interest rate instruments in order to implement monetary policy,4
3754,the escbs monetary policy strategy must be clear and transparent if we are to convince the general public both of our commitment to maintain price stability and of our ability to do so,4
3755,in recognition of the fundamentally monetary origins of inflation our strategy assigns a prominent role to money in the formulation of monetary policy,4
3756,there are clear limits to what monetary policy can and should aim to achieve,4
3757,by focusing on the reasons for our actions we can understand more easily how to get back to a normalisation of monetary policy,4
3758,in providing an answer i will concentrate on and highlight the ecbs monetary policy strategy,4
3759,instead i would argue our success can be attributed in good measure to the ecbs monetary policy strategy and the more general principles which underlie our policy making,4
3760,the ecbs monetary policy strategy    within this institutional framework how should price stability be maintained,4
3761,monetary developments can provide useful information about future price developments and thereby act as an important compass for the conduct of monetary policy,4
3762,1 as inflation is ultimately a monetary phenomenon a committed central bank can always fulfil its mandate,4
3763,let me elaborate on the nine principles presented by mishkin also in relation to the ecbs monetary policy framework,4
3764,and the term structure of interest rates always also reflects news and expectations that are not related to monetary policy,4
3765,a second important feature of our monetary policy strategy is that it is forwardlooking and has a mediumterm orientation,4
3766,the definition of price stability and the two pillars of the ecbs strategy     the complexity of the monetary policy transmission mechanism requires that the preparation discussion and presentation of policy decisions be placed in a coherent clarifying framework,4
3767,the direction of monetary policy will be carried out in a way familiar from other federal central banks such as the federal reserve and the deutsche bundesbank,4
3768,in fact in helping us to take good and timely policy decisions the monetary analysis has played an important role in our success in fully preserving the achieved anchoring of inflation expectations over the last eight years,4
3769,bearing this in mind in 1998 i suggested that elements of a strategy of monetary targeting should be supplemented in a pragmatic but not arbitrary fashion by some elements of the inflation targeting strategy,4
3770,lessons for monetary policy with regard to monetary policy in many respects recent events have served to confirm the approach adopted by the ecb since the outset of monetary union in 1999,4
3771,it is interesting to see however that recent research identifies channels through which even a small change in policy rates can have important implications,4
3772,conclusion     the single monetary policy should be credibly geared towards the maintenance of price stability over the medium term as prescribed by the maastricht treaty,4
3773,in a sense the federal reserve conducts a onesizefitsall monetary policy just as the ecb does,4
3774,the monetary policy stance is determined so as to serve the primary objective of the ecb namely the maintenance of price stability,4
3775,hitting the effective lower bound forced a bout of creativity in the world of monetary policy,4
3776,therefore in the following i will comment on the implications that such a development could have for monetary policy,4
3777,the ecbs monetary policy strategy with the primacy that it assigns to price stability forces policymakers to systematically pause and reflect not only on the future design of policy but also on past achievements,4
3778,this is important because this interest rate plays an important role in the orientation of our monetary policy,4
3779,it strengthens the credibility of monetary policy aimed at price stability and therefore enables relatively lower interest rates to be maintained,4
3780,looking ahead the ecb is resolute in its determination to maintain a high degree of monetary accommodation and to act swiftly if required,4
3781,so i congratulate you when you talk about the future monetary policy and you say that you will not relax it until certain objective conditions are met in the medium term,4
3782,there are of course also differences between the monetary policy strategies of the ecb and the snb,4
3783,so i also would like to urge you dont ascribe to monetary policy or give monetary policy tasks which it simply cannot fulfil seen over the longer term and it is the longer term that we have in mind when taking monetary policy measures,4
3784,since the review of the ecbs monetary policy strategy which took place in 2003 under the auspices of otmar issing the ecb has aimed at inflation rates below but close to 2 over the medium term,4
3785,but you have also asked me to discuss more structural issues facing monetary policy in particular the review of the ecbs monetary policy strategy which will start in the near future,4
3786,the key ecb interest rates remained the instrument for adjusting the monetary policy stance,4
3787,let me mention some of the other monetary policy options that are open to us though i hope you will understand that no final decisions have been made,4
3788,quantifying and sustaining welfare gains from monetary commitment journal of monetary economics 557 12531276,4
3789,this view rests on the assumption that monetary policymakers should do more than they are currently doing,4
3790,the policy relevance of this result has nicely been reiterated by the former vicechairman of the board of governors of the federal reserve system alan blinder 1999 who concludes that a little stodginess at the central bank is entirely appropriate,4
3791,although monetary data contain information which is important for monetary policy decisionmaking monetary developments alone will clearly not constitute a complete summary of all the economic information necessary to take appropriate policy decisions,4
3792,inflation targeting and central bank behavior staff reports 88 federal reserve bank of new york,4
3793,this principle is that of a sound monetary policy aimed at maintaining price stability,4
3794,2 b bernanke and j boivin monetary policy in a datarich environment journal of monetary economics 50 2003,4
3795,iv    beyond this economic education also matters for the effectiveness of the conduct of monetary policy,4
3796,and unsurprisingly some are calling for the ecb to put a quick end to its loose monetary policy,4
3797,engaging in communication regarding the future path of policy rates let me now turn to the second example of an innovative proposal for monetary policy that i would like to discuss today,4
3798,in this respect monetary analysis adds significantly to the robustness of the assessment underlying our monetary policy decisions,4
3799,needless to say the core function of a central bank is monetary policy,4
3800,as already mentioned above after a 4year period which allowed us to accumulate some experience the ecb decided to conduct an evaluation of its monetary policy strategy whose outcome was announced on 8 may,4
3801,let me also emphasise that all the nonstandard monetary policy measures taken by the ecb are temporary in nature and complementary rather than supplementary to our interest rate instrument,4
3802,2012 a statedependent model for inflation forecasting board of governors of the federal reserve system international finance discussion papers no 1062 november,4
3803,these first three principles and the eighth principle about the importance of central bank commitment to a nominal anchor imply that price stability or an inflation target should be the primary overriding objective of monetary policy,4
3804,accordingly the ecb deployed a series of unconventional monetary policy measures to ensure price stability,4
3805,federal reserve board finance and economics discussion series 200355    king m 2004 the institutions of monetary policy,4
3806,but if central banks were less independent and the public perceived that monetary policy could be pressured in either direction it would eventually deanchor inflation expectations and jeopardise price stability  just as in the 1970s,4
3807,monetary policy strategy     i would like to start by welcoming the positive assessment made by the economic and monetary affairs committee of the ecbs monetary policy strategy,4
3808,the first is that a commitment to a monetary policy strategy if perceived as credible by economic agents is superior to unfettered discretionary policy,4
3809,the ecbs monetary policy strategy is allencompassing in the sense that it considers all possible relationships between variables that are of some relevance for monetary policy purposes in a comprehensive and detailed way in accordance with present knowledge taking into account more than one single paradigm,4
3810,now i really do think  although in answer to a previous question i said that i dont know what a neutral stance of monetary policy is  that a short term interest rate at a historically low level of 25 percent was below what any reasonable person can regard as a neutral level of interest rates,4
3811,i should also like to highlight the fact that the single monetary policy has in fact worked very well  in terms of both the decisionmaking process and the practical implementation,4
3812,when a central bank enjoys a reputation for implementing monetary policy in a steadyhanded fashion private sector expectations of future interest rates will move in a manner consistent with policymakers intentions at all maturities in response to a policy announcement or measure,4
3813,any reflections on the future of the monetary policy transmission mechanism have to start from there,4
3814,while inflation differentials cannot be an objective for its monetary policy the ecb carefully monitors disaggregated information to assess the underlying causes of such differentials and to formulate the most appropriate monetary policy response,4
3815,discarding the exchange rate strategy for the reasons explained above the ecb selected a monetary policy strategy of its own which contains elements of pure intermediate monetary targeting and pure direct inflation targeting,4
3816,in indication of the prominent role it attaches to money in the formulation of its monetary policy the governing council of the ecb has announced a quantitative reference value for monetary growth at its last meeting,4
3817,this in turn challenges monetary policymakers to temporarily adapt their established strategies to a new environment without undermining their inflationfighting credentials,4
3818,monetary policy strategy    another element aimed at enhancing the transparency of monetary policy implementation is the explicit monetary policy strategy which was adopted last year,4
3819,key aspects of the ecbs monetary policy strategy    to achieve its treaty mandate the ecb has designed a medium termoriented monetary policy strategy,4
3820,efficient and marketoriented implementation of monetary policy   a third important building block for the credibility of monetary policy is the assurance that the operational framework is designed in a way that allows monetary policy decisions to be implemented efficiently,4
3821,therefore mediumterm price stability is the only objective monetary policy can effectively and credibly pursue with the single instrument at its disposal the shortterm policy rate,4
3822,so what i would like to discuss in my remarks today is how and why our monetary policy measures have been effective and in view of the prevailing risks whether they are still providing sufficient monetary accommodation to secure our price stability mandate,4
3823,1999 inflation targeting as a monetary policy rule journal of monetary economics 43 607654,4
3824,on contrary as i argued elsewhere the distributional neutrality of our monetary policy can only be ensured by reducing spatial fragmentation within the monetary union,4
3825,as i have discussed elsewhere we need to be attentive to the possibility of adverse side effects of the low interest rate environment2 and take this into account in the calibration of our monetary policy toolkit so as to preserve the very substantial amount of monetary support,4
3826,the core elements of the monetary union  namely price stability as the primary objective of monetary policy and an independent central bank  have remained unchanged in each of the treaty revisions since first laid down in the maastricht treaty in 1992,4
3827,by smoothing our policy rate hikes  that is moving in small steps  we can ensure that we calibrate both elements more precisely in the light of the incoming information and our reaction function,4
3828,moreover a strategy that assigns a prominent role to the monetary aggregates emphasises the responsibility of the escb for the monetary impulses to inflation which a central bank can control more readily than inflation itself,4
3829,it is worth emphasising however that the ecbs primary mandate calls for its monetary policy to deliver price stability,4
3830,successful monetary policy is not only about controlling a very shortterm interest rate but also  some would even say first and foremost  about affecting expectations of how those rates will evolve,4
3831,the second lesson is that price stability should be the primary objective of monetary policy,4
3832,thus reviewing the ecbs monetary policy decisions in 2005 and early 2006 it is useful to split this time period in two parts,4
3833,what these critics neglect to mention of course is that monetary policy always has distributional effects  even when it involves simple changes in our key policy rates,4
3834,that is the best indeed the only way for monetary policy to normalise,4
3835,if we bear all these features of monetary policy in mind we will be more aware of its limitations and will therefore certainly be still prepared to expect a lot from it but not more than it can give,4
3836,but for a central banker it represents a great accomplishment and an indispensable asset for monetary policymaking  credibility,4
3837,6for an empirical review of the effectiveness of the different elements of the ecbs monetary policy toolkit and the sources of complementarities across these instruments see my recent speech monetary policy and belowtarget inflation bank of finland conference on monetary policy and future of emu 2 july,4
3838,note that as we have entered the purdahperiod nothing i say has any bearing on upcoming monetary policy decisions,4
3839,it aims to provide an honest account of all the relevant factors considered in monetary policy deliberations forestalling any mechanistic description of monetary policy,4
3840,central bank transparency and communication of future policy rates    the second big theme i want to address is central bank transparency and in particular alans suggestion that central banks should announce their conditional monetary policy plans at least as part of their forecasts,4
3841,finally in line with a mediumterm orientation in the conduct of monetary policy we have explicitly avoided a focus on a fixed point horizon,4
3842,finally i will draw together the complementary bits and pieces of our analysis to explain our current monetary policy orientation which is characterised by two features first that we expect our key interest rates to remain at present or lower levels for an extended period of time and second that we stand ready to adopt additional accommodative monetary policy measures if and when necessary to safeguard price stability,4
3843,the natural rate benchmark therefore indicates the ideal interest rate setting for a central bank aiming to maintain price stability in a monetary economy,4
3844,it is also crucial to the successful anchoring of inflation expectations that the central bank shows it is a learning organisation that is committed in its search for the most effective policy tools in delivering its mandate,4
3845,first and foremost monetary policy should aim to repair the transmission of monetary policy by reducing fragmentation insofar as it is not related to structural causes,4
3846,at the same time a central bank which allows itself too much discretion over the time horizon when inflation should return to its target would de facto be claiming authority over redefining its monetary policy objective,4
3847,assigning a prominent role to money within the overall stabilityoriented strategy therefore guarantees that the monetary origins of inflation will not be neglected in the regular economic and financial analysis driving monetary policy decisions,4
3848,so i will limit my comments to the importance of central bank credibility for the success of inflation targeting,4
3849,conclusions    ladies and gentlemen let me conclude  the single monetary policy  firmly rooted in the principles of independence transparency and high credibility  has been remarkably successful in anchoring longerterm inflation expectations at levels consistent with price stability,4
3850,let me start by elaborating on the role of monetary policy,4
3851,furthermore the effectiveness of the policy toolkit means that we can add further monetary accommodation if it is required to deliver our objective,4
3852,the policymaking environment at the outset of stage three     the need to establish a credible and consistent monetary strategy is especially important for the escb at the outset of monetary union,4
3853,instrumental in this steadyhand framework is our notion that the appropriate horizon for monetary policy is the medium term,4
3854,as stressed by snb staff members 13 the snb  retained important ingredients of monetary targeting in its new monetary policy concept,4
3855,thus in this case an independent monetary policy is not possible,4
3856,both economic theory and past experience show that monetary stability is the primary and most appropriate objective of monetary policy,4
3857,25  none of this is to say that monetary policy is powerless,4
3858,what matters for monetary policy is not only the change in interest rates but also their level,4
3859,mr duisenberg    we have not changed policy and we will not change our monetary policy strategy  to that extent your interpretation is correct,4
3860,first they confirm the appropriateness of the ecbs mandate which assigns price stability as the primary objective of monetary policy,4
3861,in particular the monetary analysis guarantees that the ecbs monetary policy is oriented to the medium to longer term,4
3862,and let me add that the ecb has always taken firm and timely actions to pursue a monetary policy which best serves the ultimate objective of maintaining price stability,4
3863,the ecbs monetary policy framework during normal and turbulent times  the assessment of the monetary policy stance is essential in order to be able to make the right interest rate decisions at the appropriate time,4
3864,thereafter i shall discuss the main features of the institutional structure that determines monetary policymaking,4
3865,essentially this encompasses the following 1 price stability as the primary objective 2 the public announcement of an inflation rate to be maintained over a more or less precisely defined time horizon 3 transparency of the monetary policy strategy through appropriate communication with the markets and the public on monetary policy decisions and 4 greater accountability on the part of the central bank as regards the fulfilment of its mandate,4
3866,first of all the ecb is very clear about its monetary policy strategy,4
3867,in practice the choice of a monetary policy strategy should not be seen as a choice between fundamentally different theories on how best to conduct monetary policy,4
3868,a monetary policy strategy  such as the one adopted by the ecb  can be seen to provide a robust framework for monetary policy decisionmaking which heeds these two general principles in a way in which they reinforce and complement each other,4
3869,in addition to direct effects the announcement and implementation of monetary policy decisions have indirect effects via expectations about the future course of monetary policy,4
3870,finally i will share with you some views on the experience we have gained with the single monetary policy so far and on the challenges ahead,4
3871,it seems to me that these estimates these forecasts on the effects of monetary policy at the ecb are a little bit selfreferential,4
3872,39 this has important repercussions for monetary policy namely in that any interest rate set by the central bank that is not in line with the trend of the natural rate would be contractionary,4
3873,indeed monetary policy in stage three starts with interest rates which are very low by historical standards,4
3874,there are however a number of reasons suggesting that great caution should be exercised in giving such rules an important role in the actual conduct of monetary policy,4
3875,the minimum bid rate is thus the key interest rate used to signal monetary policy intentions,4
3876,a forwardlooking monetary policy requires a structured approach in order to interpret and synthesise all the information relevant for an assessment of the outlook for price developments in other words it requires a wellfounded monetary policy strategy,4
3877,in this context allow me to remind you that the emi had already achieved a broad consensus regarding the monetary policy strategy,4
3878,indeed low equilibrium real interest rates affect the monetary policy stance in two ways first any given policy rate is less stimulatory with lower equilibrium rates,4
3879,if this analysis suggests that monetary developments are a threat to future price stability monetary policy will respond in a manner appropriate to counter this risk,4
3880,at the ecb we have found it possible to extract important policyrelevant information from the monetary developments in real time,4
3881,however given the fall of the natural rate of interest14 monetary policy is more effective if deployed in sync with other policies,4
3882,the objective of monetary policy  price stability    monetary policy is not omnipotent,4
3883,my focus will be in particular on the distributional effects of monetary policy,4
3884,this endorses the view that monetary policy should not follow rigid rules in terms of the horizon for price stability or the extent of the monetary policy response on the basis of a few summary indicators,4
3885,my aim today was to characterise monetary policy as a series of links which connect the primary objective of price stability with the final effects of monetary policy decisions,4
3886,the monetary analysis in particular the subdued pace of underlying money growth confirms the prospect of price developments remaining in line with price stability over the policyrelevant horizon,4
3887,here the main idea is the following when the central bank is constrained in its capacity to reduce the shortterm interest rate further by the lower bound on nominal rates it could resort to communication about its intention to keep the shortterm interest rate at the current level for some time in the future,4
3888,mediumterm price stability is the only objective monetary policy can effectively and credibly pursue with the single instrument it has at its disposal the shortterm policy rate,4
3889,one of the aims of publishing our monetary policy strategy is to make our policy decisions transparent,4
3890,by extension they are also a precondition to the implementation of monetary policy by allowing a smooth and homogeneous transmission of monetary impulses,4
3891,one variable that central banks monitor regularly to assess whether a given policy rate may determine an excessively expansionary policy is inflation expectations,4
3892,our interest rate decisions our internal analysis of monetary developments and our presentation of monetary developments to the public are all consistent with this explanation of the role of the reference value in the overall monetary policy strategy,4
3893,third as we move forward in time the anchor for monetary policy and the main tool for shaping the stance will become the path of our key policy rates and forward guidance about their likely evolution,4
3894,as evidence in support of the view that the underlying pace of monetary expansion was increasing accumulated over time the monetary analysis signalled increasing risks to price stability over medium to longer horizons,4
3895,the exit strategy for the interest rate policy will be defined on the basis of the primary objective price stability,4
3896,on the other side it cannot be denied that a decentralised implementation of monetary policy is in some respects more complicated,4
3897,here our ability to alter the monetary policy stance relies comparatively less on the level of the overnight rate and comparatively more on influencing expectations ie,4
3898,a typical taylor rule does not keep track of the accumulated deviations of the target variables that arise from the limitations encountered by standard monetary policy at the lower bound,4
3899,another possibility explored in the literature for avoiding inflationary bias is linking central bankers remuneration to the results they have achieved with regard to the monetary policy objective persson and tabellini 1993 walsh 1995,4
3900,both arguments deserve careful consideration for the design of future monetary policy after the present normalisation phase,4
3901,likewise in its monetary policy decisions the ecb has not shied away from taking some highly unusual but appropriate steps,4
3902,we have employed nonstandard  not unorthodox  monetary policy instruments precisely for the reason to achieve our orthodox monetary policy objective of price stability,4
3903,accordingly the escb will wish to have its own areawide forecasts of inflation and other key variables as a support to monetary policy,4
3904,by contrast with the practice typically observed in inflationtargeting regimes the ecb has not specified a fixed policy horizon,4
3905,i wont be giving any definitive guide to the future shape of the ecbs monetary policy framework,4
3906,walsh monetary theory and policy 1998 mit press,4
3907,king m 2005 monetary policy practice ahead of theory mais lecture,4
3908,as a result the singleness of monetary policy was no longer ensured posing significant challenges to the ecbs policy conduct,4
3909,this is not to deny of course that the prominent role of our monetary analysis is instrumental to maintain our focus on the mediumterm horizon when the effect of monetary policy on our primary objective  price stability  will materialise in full,4
3910,disorientation about the true intentions and determination of the monetary authorities can force upon the central bank an overly aggressive pattern of reaction to inflationary risks in order to state its intentions by the force of facts,4
3911,transparency in the conduct of monetary policy is of particular importance in this respect,4
3912,developments in monetary aggregates and their impact on inflation    let me now turn to the important role played by the monetary analysis in the ecbs monetary policy strategy and interest rate decisions,4
3913,for instance if the natural interest rate level is lower than previously estimated the distance between the prevailing rate and its natural level might be lower than thought and thus monetary policy may turn out to be less expansionary than initially thought,4
3914,and i am sure that most of you will already be familiar with our activities not least with our monetary policy strategy,4
3915,i would like to conclude this discussion by noting that a significant proportion of applied monetary research emphasises that anchoring inflation expectations increases the ability of a central bank to maintain price and macroeconomic stability and has thus established a positive link between credibility and inflation stabilisation,4
3916,greening the operational framework second the ecb will continue to green its monetary policy framework,4
3917,to maintain price stability we have chosen a distinct monetary policy strategy one that reflects the special circumstances that exist at present as well as those likely to prevail in the foreseeable future,4
3918,central banks rather signalled future policy intentions implicitly by revealing information other than the future policy path  most notably information about the economic outlook and the broader monetary policy strategy including an arithmetic definition of price stability that could serve as a longterm nominal anchor for the economy,4
3919,monetary policy rate surprises are identified in the bvar by using the instrumental variable approach as in stock and watson 2012 and the target monetary policy shocks of altavilla et al 2019,4
3920,for purposes of setting out how it goes about in achieving its treaty mandate the ecb has announced a medium termoriented monetary policy strategy,4
3921,not being active in terms of space permits the ecbs monetary policy to meet the monetary requirements of the whole area,4
3922,conclusion in summary our monetary policy decisions are best served by relying on a broad analytical toolkit,4
3923,the interplay of different sets of policy measures therefore determines the wider transmission of the ecbs monetary policy,4
3924,above all the escb strategy must lead to good  that is to say timely and forwardlooking  monetary policy decisions,4
3925,certainly as the time comes to reconsider our monetary policy stance during the course of 2018 we should reflect at length on the degree to which we wish to precommit ourselves,4
3926,as i have said this is of crucial importance considering the fundamental impact ccps can have on monetary policy,4
3927,as the reform process gains momentum it will facilitate the conduct and enhance the effectiveness of monetary policy in maintaining monetary stability at a higher rate of economic growth,4
3928,at the end of my remarks i will come back to the second aspect and link it to the current debate on timing and sequencing of monetary policy normalisation,4
3929,for inflationtargeting central banks embedding this view appears to be achieved by extending the forecast horizon and by applying judgement,4
3930,so i would argue that monetary policy should focus on this goal and leave other goals to other policy areas and that includes redistribution policy,4
3931,a few studies suggest that monetary policy transmission may be nonlinear in the level of the interest rate,4
3932,central banks have only one tool for the implementation of monetary policy  the shortterm interest rate,4
3933, goals guidelines and constraints facing monetary policymakers federal reserve bank of boston pp,4
3934,finally low potential growth can have a direct impact on the tools available to monetary policy as it increases the likelihood that the central bank runs into the lower bound and has to resort recurrently to unconventional policies to meet its mandate,4
3935,5see for example taylor 2012 for a historical account of monetary policy in the us from 1985 to 2003 using policy rules as a benchmark,4
3936,so as we head down the path of monetary policy normalisation we will have to decide whether some temporary measures need to be jettisoned included in a statecontingent framework or transformed into harmonised more permanent measures,4
3937,in the latter case we have always argued for a clear separation of functions between the ecb as monetary policymaker and supervisor,4
3938,heterogeneity and monetary policy let me start with the first set of observations and respond with two counterquestions why is a low degree of heterogeneity good for monetary policy,4
3939,i intend to approach the topic from three different angles first i will give a brief overview of the process of monetary policy analysis and decisionmaking,4
3940,the topic is also one where policymakers are in a quest of researchbased advice what role should disaggregated information have in the monetary policy strategy of a central bank,4
3941,so far i have fully agreed with the role and significance of seven out of the nine principles proposed by frederic for providing the scientific underpinning of monetary policy,4
3942,institutional constraints for monetary policy    the main objective of communication policy is to make monetary policy predictable,4
3943,for example since 1997 the reserve bank of new zealand has included in its communication practice the release of the numerical projection of the future path of the policy rate,4
3944,however it would be risky for monetary policy to respond to monetary developments in a mechanical way,4
3945,a forwardlooking monetary policy must therefore be based on some indicators in order to achieve its goal of price stability,4
3946,the next logical step to ease monetary conditions is to influence more directly the term structure of interest rates which we did by introducing forward guidance in july of last year,4
3947,even then however monetary policy will generally still give due consideration to other objectives of economic policy by only gradually restoring price stability especially if the deviation from price stability is substantial,4
3948,if the reform process stops monetary policy might need to act more decisively to safeguard price stability over the medium term,4
3949,thanks to the possibility to separate standard and nonstandard monetary policy actions our nonstandard measures do not restrict in any way our capacity to tighten the monetary policy stance when necessary,4
3950,2 this holds particularly true when we approach potential turning points in the monetary policy cycle,4
3951,the prominence we have given to monetary analysis is a distinctive characteristic of our monetary policy framework,4
3952,but before i analyse more deeply the distributional impact of monetary policy action by the ecb let me first consider the distributional impact of monetary policy inaction,4
3953,they conclude that monetary policy can avoid this situation by setting the interest rate at a higher level than the one suggested by macroeconomic conditions as measured by standard indicators,4
3954,barro r and d gordon 1983 rules discretion and reputation in a model of monetary policy journal of monetary economics 12 101121,4
3955,but its power becomes more limited as the horizon over which the policy rate is intended to be at the effective lower bound extends beyond the forecast horizon,4
3956,the arguments in favour of central banks aiming for positive inflation rates with a sufficient buffer away from zero were articulated during our strategy review in 2003,4
3957,it is fully priced in line with our expressed policy intentions that the main policy rate the dfr will reach 300 basis points in march and it is priced to rise even higher subsequently,4
3958,in my view analysing monetary developments seems to be a necessary component of any monetary policy strategy aimed at preserving price stability,4
3959,the conduct of our monetary policy our monetary policy reaction function has always been firmly anchored to our objective to maintain inflation at levels below but close to 2 over the medium term,4
3960,monetary dominance means that we can  indeed we should  acknowledge and draw attention to all the consequences intended or unintended of our monetary policy operations,4
3961,finally on the basis of the preceding analysis and empirical results i will consider a number of propositions concerning first the role of monetary policy in influencing the economic cycle and second the appropriate strategy for the conduct of a stabilityoriented monetary policy,4
3962,in line with its clear mandate enshrined in the treaty and for sound economic reasons the ecb has to decide which monetary stance best serves the maintenance of price stability over the medium term and then act accordingly,4
3963,while our mro rate is still strictly above its zero lower bound giving us some scope for further reductions if deemed appropriate in the light of incoming economic and monetary data our forward guidance is primarily intended to reduce uncertainty about future policy decisions,4
3964,this feeds into expectations about future policy rates thereby strengthening the effectiveness of monetary policy,4
3965,consequently monetary developments can provide useful information about future price developments and thereby offer an important compass for the conduct of monetary policy,4
3966,let me now turn to the ecbs monetary policy strategy,4
3967,9  first an emerging literature suggests that monetary policy transmission may not be linear in the level of the interest rate,4
3968,moreover they will influence the way monetary policy is conducted,4
3969,naturally in its assessment the governing council will take account of a wide range of relevant factors  including the state of the economy in the monetary union  but always with the focus on price stability,4
3970,out of which i will only touch one the style or approach of monetary policy,4
3971,it should also be underlined once again that the monetary policy is a single one and therefore indivisible  by definition,4
3972,i will then address the third question and the policy dimension and political implications of monetary union in section 6,4
3973,a common understanding of the aim of monetary policy did develop when the monetary union was being set up today we have a clear and broadly shared consensus that the ecb should first and foremost pursue price stability,4
3974,monetary policy is accommodative when the policy rate is below the natural rate and restrictive when the policy rate is above it,4
3975,i am convinced that the knowledge gained as a result will again change and further sharpen the way we conduct monetary policy,4
3976,therefore monetary developments provide important information for any monetary policy that is aimed at safeguarding price stability,4
3977,the effects of monetary policy may depend to a considerable extent on the monetary policy regime itself and its effects on expectations,4
3978,federal reserve interest rate targeting rational expectations and the term structure journal of monetary economics 352 pp,4
3979,it follows that monetary policy although as transparent as possible cannot  and i my view should not  be fully predictable,4
3980,in being fully transparent about the ultimate goal of our monetary policy and how we go about achieving it our monetary policy strategy also makes an important contribution to the credibility and predictability of our policy,4
3981,13 hungary unilaterally shadows the erm ii with an officially announced central rate and fluctuation bands of  15 percent,4
3982,but this will be a larger pillar in which money will continue to play a prominent role in guiding our monetary policy decisionmaking,4
3983,as just noted the ecbs definition of price stability refers to a mediumterm horizon in recognition of the fact that monetary policy can control price developments only in the medium to longer term and never over immediate horizons,4
3984,at first sight the term zero lower bound seems to provide for an unambiguous metric once the relevant monetary policy rate is zero it cannot fall any further,4
3985,in the course of the last year the ecb has launched conducted and concluded an evaluation of its monetary policy strategy,4
3986,it unambiguously states that the primary objective of the single monetary policy is to maintain price stability,4
3987,to this end it is necessary to define monetary policy in greater detail,4
3988,i will explain why omts were effective from a monetary policy perspective,4
3989,and in what manner can such information be effectively employed and incorporated into our deliberations on the appropriate monetary policy stance,4
3990,mr duisenberg    as far as monetary policy is concerned we are compelled and obliged to pursue the policy that will restore price stability over the medium term,4
3991,what we can say for sure however is that there is a considerable likelihood that the way monetary policy is transmitted may change making the task of the ecb even more difficult,4
3992,all of this violates one key consensus principle in the economics profession namely that monetary policy should be based on a predictable course of action with a clearly communicated policy objective,4
3993,it is worth recalling that monetary policy always has distributional effects,4
3994,there are few historical precedents for steering monetary policy back to a normal path after a prolonged period of a very accommodative policy,4
3995,what is relevant however for monetary policy is the outlook for price stability over the medium term,4
3996,today i should like to discuss the main challenges for monetary policy at the start of monetary union,4
3997,i want to make it very clear that the necessity for monetary policy to be predictable does not mean full predictability in the very short run such as the exact timing or size of interest rate change decisions,4
3998,hence once the policy rate has reached the zlb the introduction of forward guidance and the commitment to keep the shortterm interest rate at the lower bound for a prolonged period of time would transform the zlb from a constraint into a deliberate monetary policy strategy,4
3999,the cjeu has recognised that measures that serve the objective of safeguarding an appropriate transmission of monetary policy are likely both to preserve the singleness of monetary policy and to contribute to its primary objective of maintaining price stability,4
4000,but what we learn from our analysis of how monetary policy transmission to the real economy may change in a low interest rate environment may ultimately also affect the way we calibrate and design our policy instruments as well the horizon over which we want to achieve our inflation aim,4
4001,given the considerable lags between monetary policy measures and price developments policy decisions directed at price stability must inevitably be both forwardlooking in their formulation and preemptive in their implementation,4
4002,2003b monetary policy evaluation with noisy information journal of monetary economics vol,4
4003,rather monetary policy will respond to the information revealed by the deviation so as to maintain price stability over the medium term,4
4004,to achieve price stability the escb will use a number of monetary policy instruments within the context of the chosen monetary policy strategy,4
4005,the environment in which monetary policymakers have to act is much more complex than what is assumed in modelbased analysis of policy rules,4
4006,a first reason is that expectations play an important role in the transmission of monetary policy,4
4007,mandates with several goals may overburden monetary policy given that a central bank has only one instrument the shortterm interest rate,4
4008,in addition the ecb has consistently emphasised the optionality in its monetary policy which creates space for us to respond to inflation surprises in a timely and efficient way,4
4009,interest rates    before explaining in detail the core elements of ecb policy since august 2007 and in particular since last september i would like to talk briefly about interest rates  the conventional indicators of monetary policy,4
4010,but it would also have significant implications for the conduct of monetary policy,4
4011,the longer rates in particular are very important for the transmission of monetary policy,4
4012,the mandate of the ecb implies that the monetary policy decisions of the ecb aim at maintaining price stability in the medium term based on the assessment of the risks to price stability conducted on the basis of its twopillar strategy,4
4013,more basically monetary growth in line with the reference value should be consistent with the maintenance of price stability at that horizon,4
4014,17  there are two elements to our monetary policy strategy that institutionalise this approach,4
4015,developments since the start of monetary union have confirmed that the ecb has chosen a solid and efficient framework for monetary policy,4
4016,if such changes imply that for any given policy interest rate the monetary conditions are somewhat tighter than they would have been in the preturmoil period that will of course have to be taken into account when setting the policy rate,4
4017,finally a key element of the ecbs monetary policy strategy is its mediumterm orientation which implies that it does not attempt to maintain or restore price stability in the very short term in the wake of economic changes,4
4018,it is worth emphasising however that our primary mandate calls for our monetary policy to deliver price stability in the medium term,4
4019,what the ecb can do to help in this area is first of all to maintain stable monetary conditions,4
4020,first it can provide greater monetary policy accommodation when the policy rate reaches the zlb by providing assurance that the central bank will keep the policy rate at low levels for some time and for a longer period than the public initially expected,4
4021,i will then say a few words on whither we will exit particularly as regards the monetary policy implementation framework,4
4022,in may 2003 in the light of the experience acquired in its first five years the ecb conducted an evaluation of its monetary policy strategy,4
4023,the federal reserve stabilised its monetary policy portfolio in october 2014 and started to raise the federal funds rate more than a year later,4
4024,i do not need now to explain in detail why we at the ecb insist that the best contribution monetary policy can make to growth is to maintain price stability,4
4025,this is in turn related to the approach followed by that monetary policy the basic philosophy which characterises it,4
4026,1  why is it essential for a central bank to be independent to conduct monetary policy,4
4027,in other words the conduct of a stabilityoriented monetary policy is the means by which over the medium term price stability is established and maintained,4
4028,it should allow precise and differentiated signals of monetary policy intentions to be given,4
4029,against this background it would certainly be very unwise to ignore monetary developments and their connection to inflation dynamics in the conduct of monetary policy,4
4030,at the same time however the ecb remains sceptical towards the idea that all problems of practical monetary policy making have been solved by the current generation of theoretical models  and towards the conclusion that good monetary policy must invariably coincide with inflation targeting,4
4031,my aim today is to provide an interim analysis of the ecbs current policy rate tightening cycle,4
4032,however announcing ones own conditional policy rate projections may be problematic since policymakers do not always find it easy to agree on the future path of policy rates over the forecast horizon,4
4033,link to the monetary policy strategy  the first cornerstone of the our exit strategy is the link to our primary objective and thus to our monetary policy strategy,4
4034,4 christiano and rostagno 2001 present a theoretical framework showing that monitoring monetary dynamics can help to minimise the possibility that inflation expectations might settle on a point that is inconsistent with the central banks inflation objective,4
4035,certainly our policy creates the preconditions for rates to rise back towards more normal levels,4
4036,but the delegation of monetary policy to an independent body rests on the premise that such effects are not first order,4
4037,however as the equilibrium rate falls the central bank faces challenges coming from the lower bound on nominal interest rates as it attempts to reduce its policy rates to a low enough level,4
4038,ecb staff recently published several occasional papers related to the monetary policy strategy review,4
4039,that is why an effective monetary policy depends to a large extent on pegging those expectations to the goal of price stability,4
4040,in this way monetary developments support a correct calibration of monetary policy,4
4041,given the lags in the transmission of monetary policy to the price level monetary policy must be forwardlooking,4
4042,federal reserve policy in an international context paper presented at the 16th jacques polak annual research conference hosted by the international monetary fund november 56 2015,4
4043,first  given its importance  i shall outline the monetary policy strategy which has been adopted by the governing council of the ecb for stage three of economic and monetary union emu,4
4044,however the escbs monetary policy will ensure that these transitory deviations from the definition do not become ingrained over the medium term,4
4045,secondly by no means can one maintain that the monetary policy stance of the ecb is not accommodating already,4
4046,some academic economists have advocated that particularly in such a situation the central bank should engage in active communication regarding the future path of policy rates,4
4047,second i will discuss the monetary policy implementation in practice,4
4048,first when central banks come up against the effective lower bound the possibility disappears to use current changes in the short rate to signal the policy response to a changing inflation outlook,4
4049,in my remarks today i would like to highlight a number of important statistical requirements for the effective conduct of monetary policy focusing in particular on the ecbs monetary analysis,4
4050,on the role of the terminal rate in monetary policy setting see my remarks at the highlevel panel lane pr,4