2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association, pp. 88-92. 7  Structural policies and the European Semester The second broad area of reform I would like to talk about is structural policies. The magnitude of the structural challenges ahead reveals the need to revamp the European Semester. This mechanism to coordinate the policy actions to correct countryspecific imbalances and implement necessary structural reforms has had limited success. And the challenges ahead, especially in the aforementioned areas of digitalisation and the climate transition, are enormous. As shown in Slide 8, according to the European Commission’s assessment, governments’ policy responses to country-specific recommendations have provided insufficient progress to address the necessary structural challenges. This clearly calls for a thorough discussion about how to increase their effectiveness. In this sense, a revamped European Semester could use the experience of the Recovery and Resilience Facility, within the NGEU programme, to provide the correct incentives to Member States. The explicit link in NGEU between the implementation of agreed structural reforms at the country level and the access to grants has provided, according to the Commission’s assessment of the national plans, much greater government commitments than in the past. Indeed, if the reforms announced in the Recovery Plans are fully implemented, the large majority of the structural challenges that European institutions have highlighted in the past will be addressed (see Slide 8). Of course, it is now crucial that their implementation over the coming years confirms these positive developments.

Coupled with a sizeable fiscal impulse, both types of actions were successful in delivering the stimulus needed to counteract the shortfall in aggregate demand, stabilise output and initiate the economic recovery. Unemployment in both jurisdictions, which had spiked in the early phase of the crisis, levelled off and began to decrease. 1/7  BIS central bankers' speeches  At this point, however, the euro area entered the second phase of the crisis, causing its growth trajectory to diverge substantially from that of the United States. It experienced a sovereign debt crisis in 2011–12 which was unique among advanced economies. Fears about the sustainability of the sovereign debt of some euro area Member States triggered a sharp widening of sovereign spreads and introduced the fear of redenomination risk: that some countries would revert to national currencies, invariably weaker ones, and thus leave the euro area. Moreover, banks in some countries came under intense scrutiny over their domestic sovereign holdings and some national banking systems completely lost access to wholesale funding markets. Private investment contracted as the cost of capital rose and uncertainty spiked. The fiscal stance in the euro area shifted from expansionary to contractionary as governments acted to restore market confidence. The euro area entered a renewed recession. The second phase: unique institutional challenges The ECB responded to the sovereign debt crisis with various new monetary policy measures, such as our long-term lending operations, and even began purchasing sovereign bonds under the Securities Markets Programme.