These securities, such as mortgage-backed bonds, are linked to credits guaranteed by property assets. However, the fact that the external deficit is easier to finance within a monetary union should not conceal the factors of uncertainty derived from the losses in competitiveness and the growing indebtedness of households and firms underlying the deficit, because they may ultimately affect the sustainability of medium-term growth. In the short run, forecasts are for the continuity of the expansion. The central scenario for the coming quarters is set against the substantial buoyancy of the world economy, the smooth adjustment of monetary and financial conditions and the gradual re-absorption of the overvaluation of housing. And it continues to point to a gradual rebalancing of spending, with a slowdown in domestic demand and an improvement in the contribution of external demand. We are thus before a scenario that offers, in principle, sufficient room to face the vulnerabilities that have emerged and to address the measures needed to consolidate the continuity of the expansion. But there is a risk that the restructuring of spending will not be of sufficient intensity or that it will not increase the responsiveness of supply to the extent needed, meaning that the imbalances will continue to grow deeper, thereby raising the probability of a more marked adjustment in the medium run. Economic policy challenges Given the situation described, an economic policy commitment to rebalancing demand and, in particular, to containing domestic expenditure is particularly necessary.

Technological advancements, while also reducing distribution costs, can limit firms’ pricing power by facilitating price discovery by customers. For example, the advent of online retail platforms has greatly increased price transparency among consumers as the share of people searching for information online has risen continuously in the euro area. The downward pressure on mark-ups and, hence, prices associated with the spread of e-commerce is consistent with an erosion of euro area firms’ profit margins, which did not return to their pre-crisis levels until late 2014. Empirical analysis does not, however, find robust evidence that mark-up shocks have been a particularly dominant determinant of disinflationary tendencies since the crisis. In any case, these forces are only temporary: they can move inflation away from its long-run trend, even for a protracted period of time, but cannot affect trend inflation itself, unless they infiltrate inflation expectations. It is through inflation expectations that shocks to the inflation formation process which would otherwise have no relevance for a central bank can become a monetary policy problem. This brings me to the third element in the Phillips curve – its intercept – which is determined by inflation expectations. Inflation expectations In normal conditions, longer-term inflation expectations should be unaffected by transitory shocks, which typically dissipate over the medium term. However, recurrent shocks leading to a protracted period of low inflation can be misinterpreted as a lasting decline in trend inflation, and could jeopardise public faith in the central bank’s commitment or ability to deliver on its objective.