##modative monetary policy stance, ongoing improvements in financing conditions working their way through to the real economy, and the progress made in fiscal consolidation and structural reforms. in addition, real incomes are supported by moderate price developments, in particular lower energy prices. economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports. at the same time, although labour markets have shown the first signs of improvement, unemployment in the euro area remains high and, overall, unutilised capacity is sizeable. moreover, the necessary balance sheet adjustments in the public and private sectors will continue to weigh on the pace of the economic recovery. the risks surrounding the economic outlook for the euro area continue to be on the downside. developments in global financial markets and in emerging market economies, as well as geopolitical risks, may have the potential to affect economic conditions negatively. other downside risks include weaker than expected domestic demand and insufficient implementation of structural reforms in euro area countries, as well as weaker export growth. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 0. 5 % in march 2014, down from 0. 7 % in february. the decrease reflects falls in the annual rates of change bis central bankers ’ speeches of the food, goods and services components, partly offset by a more moderate decline in energy prices. on the basis of current exchange rates and prevailing futures prices for energy, annual hicp inflation is expected to pick up somewhat in april, partly related to the volatility of service prices in the months around easter. over the following months, annual hicp inflation is expected to remain low, before gradually increasing during 2015 to reach levels closer to 2 % towards the end of 2016. at the same time, medium to long - term inflation expectations remain firmly anchored in line with price stability. the governing council sees both upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term. in this context, the possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely. turning to the monetary analysis, data for february 2014 point to subdued underlying growth in broad money ( m3 ). annual growth in m3 was broadly stable in february at 1. 3 %, compared with 1. 2 % in january. the growth of the narrow monetary aggregate m1 remained robust at 6. 2 % in february, after 6. 1 % in january. the main factor supporting annual m3 growth continued

to make the financial sector safer by strengthening the regulatory and supervisory framework – what has been termed “ risk reduction ”. and second, to deepen risk - sharing by creating the institutional conditions for more robust financial integration, which has been one key aim of the banking union. it is this latter aspect, and why it matters for monetary policy, that i would like to focus on in my remarks today. the main point i would like to make is that we need a more integrated banking sector in the euro area to achieve greater macroeconomic stability. but to achieve this, private and public risksharing have to be seen as complementary – that is, we cannot expect to have a fully integrated banking sector that can share risks without common institutions that can also share risks, namely for deposit insurance and bank resolution. without such institutions, there is a real prospect that the banking system will remain fragmented, and that is ultimately to the benefit of no one in the euro area. financial integration and monetary policy transmission why is financial integration in the euro area, especially in the banking sector, and the resulting degree of risk - sharing so important for monetary policy? the financial system helps smooth out 1 / 5 bis central bankers'speeches temporary fluctuations in economic conditions. companies and households can resort to financial intermediaries – in the euro area, typically banks – to accommodate their temporarily higher financing needs and reduce fluctuations in spending patterns. this leads to a higher degree of macroeconomic stabilisation. a sound financial system reduces the burden on monetary policy, which would otherwise have to step in to stabilise the economy. while banks in principle help to stabilise investment and consumption patterns, they can also contribute to procyclicality by becoming shock amplifiers or even trigger financial shocks. one of the main lessons of the crisis was that in order to effectively transmit monetary policy impulses to the real economy, banks need to be well capitalised through the cycle and conduct maturity transformation in a prudent manner. the euro area consists of a diverse group of countries with different degrees of specialisation in different economic sectors and in different segments of the value chain. short - term fluctuations as well as the long - term shifts in the global economy can have very different contrasting implications for individual euro area economies. these disparities have at times been compounded by diverging policy stances, for instance overly loose fiscal policies in countries that were already overheating compared with their euro area peers. in addition, varying macroeconomic dynamics are