/ 2020 / html / ecb. sp201006 ~ e1d38a1ccc. en. html 1 / 12 07 / 10 / 2020 the ecb ’ s monetary policy in the pandemic : meeting the challenge sources : haver and ecb staff calculations. notes : aggregation based on data for germany, spain, france, italy and the netherlands. the latest observations are for the second quarter of 2020. this assessment underpins the baseline scenario of the september ecb staff macroeconomic projections. despite the recovery in the second half of the year, output at the end of 2020 is projected to remain about 5. 2 percent below the level of output at the end of 2019. economic activity is foreseen to return to pre - pandemic levels only towards the end of 2022, with output expected to expand by 5. 0 percent in 2021 and 3. 2 percent in 2022. in any event, the range of possible outcomes in the projections remains very wide. this is illustrated by the alternative projection scenarios ( the baseline projection is flanked by mild and severe scenarios ), as shown in chart 2. in view of the uncertain economic and financial outcomes of the pandemic, the balance of risks is tilted to the downside. chart 2 realised and projected output ( indexed real gdp, q4 2019 = 100 ) https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201006 ~ e1d38a1ccc. en. html 2 / 12 07 / 10 / 2020 the ecb ’ s monetary policy in the pandemic : meeting the challenge sources : ecb staff macroeconomic projections and eurostat. notes : the projections refer to the september 2020 ecb staff macroeconomic projections. the latest observations are for the second quarter of 2020 for realised data and the fourth quarter of 2022 for projections. the pandemic shock has left its mark on inflation dynamics. euro area hicp inflation has been declining for several months : after turning negative to minus 0. 2 percent in august, the flash estimate for september signals a further decline to minus 0. 3 percent in september. while some temporary factors ( such as the time - limited vat cut in germany ) have contributed to this sharp decline, the drop in inflation also reflects weaker underlying pricing pressures across both the goods and services sectors. we expect headline inflation to remain negative for the remainder of the year, before

##lter even before the crisis. so the financial crisis deepened the economic slowdown, but this was not the only cause. last years have also shown that the economic pillar of the maastricht emu was not robust enough. the contagion can be an especially pronounced problem in a monetary union and we need stronger framework and stronger tools to tackle it. at the same time, we need to be fair : this has not been just a crisis of politics or a crisis of the emu. the economic theory and especially the modern theory of finance have been challenged. this crisis has cast doubt on many commonly held beliefs from the last 25 years. many textbooks will be re - written. bis central bankers ’ speeches but still there are issues which we have learnt in economics and economic history which have passed the test. first : a growth model based on ever - growing debt levels won ’ t last. second : the stability of the whole economy is important, not only the control of public deficits. the economy needs to be competitive. third : an educated workforce, reliable institutions and a functioning infrastructure provide a foundation for renewing the economy. how have we changed the eu and emu? as to the emu, the economic governance has been strengthened based on the lessons learnt. first, we have now a stronger stability and growth pact ( sgp ) and the new macroeconomic imbalances procedure, which pays attention on the balanced development of the whole economy. the governance has also been improved. second, the crisis management structures have been developed and the esm has been in place since last october. third, the banking union is an important step towards further strengthening of financial stability. we have not only new rules, we have also more market discipline. we need both. true ownership of the governance is crucial. we need more europe and we need more national responsibility. a clear separation of responsibilities between brussels and the member states is very important. as regards the crisis management structures, the esm as a crisis fund is just a part – although an important part – of the story. it is of utmost importance that the design of the adjustment programmes relies on state of the art expertise, practices and experience. the programmes must be built on realistic assumptions on the macro outlook and public debt stability. this is the best way to guarantee that the financial support drawn from the esm remains a bridge loan instead of becoming a permanent transfer. i find also the role of the imf important and useful. i hope