situation, the underlying reality was that government finances were often buoyed artificially by cyclically sensitive revenues. with the deterioration of the economic situation the structural weaknesses in the underlying fiscal position became evident culminating in the current sovereign debt crisis in some euro area countries. these developments highlight important shortcomings not only at the level of national policymaking but also with respect to the institutional framework at the european level. the stability and growth pact ( sgp ) was watered down in 2005 and has been ineffective in preventing the build - up of significant fiscal imbalances. peer pressure has not worked and the changes in the fiscal rules in 2005 have led to excessive political interference and the lack of effective implementation. moreover, the institutional framework so far lacks any effective tools for macroeconomic surveillance which could prevent the emergence of bis central bankers ’ speeches macroeconomic imbalances. the broad economic policy guidelines have proven not to be an effective tool. before turning to the necessary policy responses i would like to stress that the fiscal and macroeconomic policy challenges are not problems which some euro area countries face in isolation but are also evident in many other advanced economies outside the euro area. government deficit and debt levels have reached historically high levels. concerns about the soundness of fiscal policies are a broader phenomenon, as, for example, discussed in imf research and highlighted by the recent lowering of the outlook for the u. s. sovereign debt rating. also issues of competitiveness and external imbalances are global in nature and not specific to the euro area. but this is not an excuse for the europeans not to bring their house in order. what has to be done? a number of policy implications for the euro area follow from this analysis. the main objective has to be a smooth functioning of emu which implies that countries follow a path of sustainable and balanced growth. the strategy to achieve this consists of two key elements : first, to unwind the imbalances that had arisen during the first decade of emu ; and second, to ensure an adequate institutional framework and sufficient structural flexibility of individual member states so that the risk of such imbalances occurring again is minimised. the first challenge is to restore price and cost competitiveness. in a monetary union such as the euro area, with a single currency and a single monetary policy, the main adjustment mechanism is the competitiveness channel which works via an adjustment in relative prices and costs. over the next few years, the restoration of competitiveness will require significant further adjustments

. g. gopinath et al. 2017, highlighting deteriorating factor allocation in italy and spain ). a recent paper by bils et al. suggests, however, that if one corrects for measurement error, the entire increase of allocative inefficiency in us manufacturing since the late 1970s disappears. it may therefore be advisable to wait until measurement errors are also accounted for in the literature on non - manufacturing sectors and on europe before drawing clear - cut conclusions. regarding innovation jones argues that their contribution can either be driven by the impact of new ideas and processes on total factor productivity ( “ ideas tfp ” ) or the research effort pushing new ideas ( such as the number of researchers employed ). gordon ( 2016 ), for example, suggested for the us that ideas with the same productivity benefits are harder to discover today than in history. jones – in joint work with bloom, van reenen and webb ( 2017 ) – finds that this is a rather general phenomenon across different sectors and products, detecting significant reductions in “ ideas tfp ”. over many decades, however, this was compensated by overproportionate increases in research effort. as research employment growth has slowed down since the early 2000s – mostly in japan, significantly in the us and to a lesser extent in the european union ( see figure 1 ) – the phenomenon has become more harmful today than it used to be. this can explain the productivity slowdown and is consistent with gordon ’ s thesis. but it 1 / 16 bis central bankers'speeches puts the emphasis on ways on how to maintain a sufficiently high research effort. on historical grounds, joel mokyr ( 2017 ) challenged the view that it is the nature of today ’ s innovations that accounts for the productivity slowdown and staged a forceful rebuttal of “ technopessimism ”. first, economists ’ primary measures of innovation – estimations of total factor productivity and counting of patents – both underestimate their productivity effects. second, in history humans have overcome the fact that the technological fruits that can still be picked are hanging higher and higher through building “ taller and taller ladders ”. this “ arboreal metaphor ” illustrates a feedback from technology to science. the technological tools detected over centuries that made that possible included the telescope, the microscope, the eudiometer or, more recently, x - ray crystallography. two prominent and powerful tools today are laser technology and computers. the “ hot technology of the day ” is machine learning