, there is a lack of demand, or under - utilisation of capacity, in another region of the euro area, a well functioning adjustment mechanism ensures that such divergences do not become too persistent and do not lead to an unwelcome dispersion of countries ’ business cycle positions. to be sure, the available empirical evidence on output growth and inflation differentials within the euro area shows that the magnitude of inflation and output growth differentials across the euro area countries is not exceptional and is comparable to that in the united states. in addition, it appears that cyclical synchronisation in the euro area is relatively high. however, contrary to the experience of the us regions, output growth and inflation differentials in the euro area have been rather persistent and seem to be largely driven by persistent positive or negative deviations from the euro area averages. over the last ten years, the performance of euro area national economies in terms of real gdp growth rates has been polarised, with a group of countries growing persistently at lower rates than the euro area average and another group growing persistently at higher rates. these trend deviations reflect in particular differences in the potential growth. in turn, these differences can be very much related to the different degree of market flexibility in each single country and to the structural reforms that have been implemented in the past. hence, structural reforms are needed that help to reduce output growth differentials in two ways : first, by increasing potential growth, especially in those euro area countries that have shown a persistently low growth performance ; and second, by enhancing the functioning of the key channels or mechanisms of adjustment within the euro area, namely the trade channel and the risk sharing channel. i have discussed the impact of reforms on productivity and potential output growth one minute ago. let me now elaborate on the second issue by giving you some examples of how structural reforms could improve the adjustment mechanism within the euro area. first and foremost, it is important to increase price and wage flexibility within the euro area in order to allow firms to quickly adjust their cost and price structure to the changing demand conditions for their products. for example, following a negative demand shock in one country, a lack of competition and the related rigidities of wages and prices – including stickiness of nominal wages and excessive protection – would hinder the market adjustment that entails lower prices and costs for domestically produced services and goods. in this case, the real exchange rate ( or the trade ) channel cannot work effectively and higher

impulses may become impaired and the central bank has to resort to non - standard measures. let me elaborate on that. in normal times, central banks provide liquidity to the banking sector through open market operations. typically, banks obtain central bank liquidity against the provision of central bank eligible collateral in a repo transaction. by setting the interest rate of its open market operations, the central bank can directly steer the risk - free rate in the short end of the money market. this then feeds through to other, longer - term interest rates and ultimately to credit conditions applied to the real economy. during financial and especially banking crises, banks ’ demand for central bank liquidity may sharply increase to compensate for the decline in other forms of banks ’ liabilities, often resulting from withdrawals of bank deposits. by accommodating such an increase in the demand for liquidity, the central bank is the only agent able to prevent a process of disorderly money - supply contraction. the stabilising role of the additional liquidity is especially strong if it is supplied for longer maturities. in this way, access to central bank liquidity allows banks to obtain funding at the policy rate – as long as they have the required collateral and a sound business model. thus, the central bank can use the amounts and modalities of its liquidity provision to the banking sector to influence prices in the money market and other markets for relevant assets. by easing the pressure to abrupt deleveraging, the central bank can reduce the likelihood of a credit crunch and adverse spiralling dynamics, thereby addressing downside risks to price stability. it should be kept in mind however, that monetary policy can exert mitigating effects, but cannot solve the underlying problems, often of a structural nature. in addition, the creation of abundant liquidity can in itself create side effects that need to be carefully monitored. first, there is a risk of distorting the incentives to carry out the necessary adjustment by favouring evergreening of loans and “ zombie - bank ” - type dynamics. this would represent a continued source of uncertainty about banks ’ exposures to non - performing loans, about the possible implicit liabilities faced by governments and ultimately a drag to economic growth. second, large liquidity - providing repo operations increase asset encumbrance in the banking sector. banks tie certain types of collateral with the central bank, and these assets are no longer available to the bank for other types of transactions. and this increases banks ’