ignazio visco : financial stability in a world of very low interest rates keynote speech by mr ignazio visco, governor of the bank of italy, at the 43rd general assembly of the geneva association, rome, 9 june 2016. * * * since the 1980s we have been observing a marked downward trend in nominal interest rates in the major advanced economies. this decline is explained by lower inflation and inflation risk premia, and by a reduction of real interest rates. in these countries real long - term yields have fallen on average from around 5 percent in the early 1980s to about 2 percent before the financial crisis, and to approximately zero percent today. more recently, very low or even negative interest rates mainly reflect the slack in the economy and excessively low actual and expected inflation. the euro area, in particular, is still slowly recovering from two consecutive financial crises and a long recession. real gdp has only recently returned to the 2008 level and cyclical positions continue to differ across member states. inflation remains well below the levels consistent with the ecb definition of price stability : it has now been below 1 percent for almost three years and in the last few months it has turned negative once again. core inflation ( which excludes the more volatile components ) has not exceeded 1 per cent over the last two years ; it reached a historical minimum ( 0. 6 % ) at the beginning of 2015 and stands only slightly above it in the latest readings. the risk of a de - anchoring of inflation expectations has become material since mid2014 and is still high, although it declined at the beginning of 2015 following the announcement by the ecb governing council of its public sector purchase programme. while these considerations indicate that the current low level of interest rates is not an arbitrary choice of central banks, the risks posed by a protracted, very accommodative monetary policy need to be monitored carefully. and so they are. very low ( or negative ) interest rates for too long raise fears that they may be a source of financial risks by fuelling asset price misalignments and endangering the profitability of financial institutions. the risk of asset price misalignments ( or “ bubbles ” ) is strictly connected to the incentives for an excessive “ search for yield ” that an environment of low nominal and real interest rates creates for investors and financial intermediaries alike. at present, indicators of imbalances in housing and credit markets do not point to increasing vulnerabilities in the euro

that german reunification could trigger optimism at home but anxiety abroad. you knew that the best way for germany to demonstrate the strength of its historical responsibility to europe was to share a currency with its neighbours. at the same time, a single currency would safeguard the single market against the risk of competitive devaluations. so we can be thankful that, when the crisis erupted, you were once more in a position of influence. you reminded us that the euro has always been more than just a currency, and your unyielding defence of europe was a bulwark in those febrile times. this is best captured in your belief that “ if a solution is good for europe, it is good for germany ; and if something is bad for europe, it cannot be good for germany. ” 1 of course, there have been different views about what constitutes a “ good solution ” for europe, such as the appropriate balance between sharing risks and reducing risks. 1 / 3 bis central bankers'speeches but i was always struck by the fact that, once you had agreed a way ahead with your european partners, you defended it with conviction. i know that this was not easy : you had to tread a careful path between maintaining confidence in the euro at home and making the necessary reforms to safeguard the single currency. the fact that 81 % of germans back the euro today, and the euro is more popular than ever among the wider european public, is testament to your skill in navigating that course. 2 what allowed you to achieve this was your second quality : your intellectual rigour. i have had many occasions to observe your forensic mind at work. you combine the subtlety and foresight of a statesman with the scrutiny and attention to detail of a tax lawyer. you are notorious for your ability to pick apart shallow arguments and for your intolerance of superficiality. your brilliant mind has often put you at the forefront of european debates. in the 1990s you were already writing about how to build a more deeply integrated european framework around the countries that would go on to share the single currency. 3 you understood very early on that a monetary union comprising different sovereign states can only be sustainable if there is mutual trust. and you realised that trust does not emerge through declarations or treaties : it is built through actions that demonstrate the commitment of states to abide by the promises they have signed up to. you saw, in other words, that rules are not an end in themselves. i have so often heard you