know there is a lively debate among economists about how much new technologies can add to productivity growth going forward ( “ technooptimists vs “ techno - pessimists ” ). but for now we do not observe a major slowdown in innovation : productivity growth in global frontier firms remains robust. and the performance of euro area firms at the frontier has been broadly comparable with that of other advanced economies in manufacturing in recent years. where the euro area is lagging behind is in services, where frontier firms are less than half as productive as their global peers. why this is happening is complex, but seems in part to be a result of lower investment in human capital and in intangibles, such as r & d, which are key to push out the frontier. to give just one measure of differences in innovation, in absolute terms the us still submits more patents to the european patent office than does the euro area. contrary to popular wisdom, the best way to improve our living standards may not be to “ re - industrialise ” europe but rather to make services more productive. so what can policymakers do? one thing that is clear is that government support for innovation 1 / 3 bis central bankers'speeches matters : in europe differences in innovation capacity across countries are closely related to public spending on r & d, particularly in basic research. 1 hence such spending needs to be prioritised in national budgets and in the eu budget, and in particular in situations of fiscal consolidation. spending on higher education is also key : the us spends about twice as much on tertiary education per pupil as we do in europe ( including private contributions ). 2 yet the problem is not just innovation. across all advanced economies, productivity growth in non - frontier firms has not been keeping pace with the leaders. in the euro area, non - frontier productivity has overall stagnated in manufacturing since the early 2000s, and has even declined in the services sector. 3 and this is where diffusion comes in. put simply, markets are not setting the right incentives for non - frontier firms to invest in adopting, understanding and incorporating new technologies into their production process. for example : barriers for young, innovative firms to enter markets and expand domestically or internationally are too high ; competitive pressures on incumbent firms are too low ; and unproductive firms exit too rarely, preventing reallocation of resources to others. the aim of “ structural reforms ” in europe should therefore be to raise business dynamism and productivity, not to

uncertainty is high and recovery still weak, downside risks from an early removal loom large and would call for a cautious extension of expiring measures. going forward, the appropriate modulation of exit strategies must take careful account of the evolution of underlying sanitary, economic and financial developments. second, non - financial firms ’ indebtedness is expected to increase significantly, giving rise to debt overhang problems. in the wake of the first stage of the crisis, it had to be ensured that firms were able to obtain financing to cover cash shortfalls created by lockdowns. speed in the delivery of funds to hundreds of thousands of cash - strapped small firms – as we observed in italy – was key. in several jurisdictions this was achieved by designing policies, such as loan guarantees, that made use of the existing bank lending “ infrastructure ”. yet, as corporate revenue losses are unlikely to be recouped entirely, this bridge financing may lead to a permanent increase in leverage for some firms. this creates challenges in the medium term ; it could lead to generalised debt overhang problems that would reduce firms ’ investment, weaken competitiveness and hamper economic growth. therefore, capital - strengthening measures by governments to reduce non - financial firms ’ leverage and increase their debt servicing capacity seem to be necessary. several options have been proposed and, in some countries, already implemented, such as direct cash transfers, purchase of equity stakes or subordinated debt instruments by special purpose vehicles with public capital, and fiscal incentives to favour private equity injections into firms. the challenges are nevertheless substantial. an efficient use of public funds calls for the establishment of procedures which effectively separate, in a fast - moving environment, those firms deserving of support from the non - viable ones. this will undoubtedly be a demanding task ; at the same time policy measures should be tailored to account for the differences between the governance of ( often very ) small firms, mostly managed by their owners, and larger firms ( often joint stock companies ), run by managers on behalf of shareholders. losses from public investment in firms ’ equity should be minimised, if not completely fended off, while at the same time avoiding excessive and intrusive interventions in business governance and decisions. third, how to ensure the resilience of the banking system in the face of a likely surge in credit losses is a crucial question. banks entered the pandemic crisis with much stronger capital and liquidity positions than before the global financial crisis, not least because of