quality are therefore clearly sub - optimal from a monetary policy perspective. m y third reason for why real convergence matters is related to the second point : just as institutional quality matters for monetary policy and closing income level gaps, so do integration and risk - sharing. deeper integration will help smooth consumption through asymmetric shocks, rather than amplifying those shocks, and will support the process of real convergence. for example, labour mobility between countries is low and, as we have seen in recent years, is unlikely to be a major source of adjustment once a crisis hits. although there was an increase in labour mobility in crisis - hit countries, the overall adjustment was limited. similarly, financial integration has come to a halt. 7 on slide 7 you can see that the latest level of the ecb ‘ s quantity - based financial integration composite indicator is comparable to the level in 2004, and the latest level of our price - based composite indicator is roughly comparable to levels observed between 2000 and 2004. 9 / 15 bis central bankers'speeches as a result, and in the absence of large - scale fiscal transfers between regions, the degree of risk - sharing in the euro area is lower than in other currency unions. one recent estimate finds that between 1999 and 2014, total risk - sharing through both public and private channels in the united states smoothed 57 % of country - specific shocks, compared with just 29 % in the euro area. 8 this greater degree of risk - sharing derives not just from federal fiscal transfers, but also from greater risk - sharing through credit and financial channels. credit provision dried up in certain countries during the crisis at precisely the moment when it was needed to smooth income shocks. clearly, deeper financial integration is needed. and as i said elsewhere, convergence is also a political prerequisite to engage in a discussion on any new public risk - sharing mechanisms – just like john rawls pointed out with his concept of the “ veil of ignorance ”. 9 10 / 15 bis central bankers'speeches convergence and the need for efficient economic institutions all this means that if we want to achieve sustainable economic convergence – if we want to reap the full potential of our economies – then we also need to strive for convergence towards high institutional quality and strengthen the integration of our economies and markets. this is also in the interest of monetary policy as i have just explained. and i want to be clear here, i am talking about convergence in institutional quality, rather than convergence in institutions. in other words, what matters is not

maastricht criteria in every year since its launch, highlighting the tensions between maintaining desired convergence and potentially centrifugal economic forces. similarly, and as i argued recently, hysteresis effects – should they materialise and the jury is still out on this – have the unfortunate consequence of locking in crisis - related income losses and may result in higher rather than lower inflationary pressures. 4this is not to say that they are not a 7 / 15 bis central bankers'speeches source of concern, but the answer should be a structural, not a monetary one. yet, despite this, i would argue that a lack of real convergence does matter for our union and the conduct of monetary policy, for three main reasons. first, and most importantly, the lack of real convergence matters greatly for people in lowerincome countries. without credible prospects of catching up with higher - income countries, some may question the benefits of membership of the currency union. in other words, without real convergence we would not deliver on the promise we made when the euro was introduced, namely that it would bring prosperity and opportunities. worse, with the legacy costs of the crisis still clearly visible in many member states, aboveaverage growth in these economies is needed to at least restore a sense of normality and help bring down both the overhang in debt levels and unacceptably high youth and long - term unemployment. in a union based on shared values, hardship in any one country should be a concern for us all. and a lack of market - based convergence raises the need for individual transfers, which exist at country level but are not part of the social contract on which our monetary union is founded. second, the lack of real convergence in income levels is, more often than not, the result of a lack of convergence in institutional quality. slide 6 shows that there is a clear relationship ( albeit not necessarily causal ) in europe between the quality of institutions and gdp per capita. 5 large differences in institutional quality, in turn, can complicate the conduct of monetary policy. 8 / 15 bis central bankers'speeches the reason is that large differences in the way price and wage - setting mechanisms and financial structures are set up can lead to output and inflation responding to shocks in different ways – that is, it leads to the type of cyclical heterogeneity i mentioned earlier that may, as a result, cause the appropriate monetary policy stance to vary across the currency union. 6 such differences in institutional