at the end of my remarks. research by nicholas bloom analysing the effects of uncertainty shocks on the economy is a prime example of a policy - relevant research output. published in econometrica in 2009, it could not be more timely. 1 the unprecedented level of uncertainty has been one of the key distinguishing features of the great recession. economic uncertainty refers to an environment in which little or nothing is known about the future state of the economy. there is a variety of sources of economic uncertainty, ranging from wars, acts of terrorism and natural disasters to changes in economic and financial policies. professor bloom highlighted the adverse effects of heightened uncertainty on economic activity. uncertainty leads firms to cut back or defer hiring and investment decisions. it also drives consumers to put off buying new goods. as a result, uncertainty can escalate financial stress and recession, as well as nicholas bloom, 2009, “ the impact of uncertainty shocks ”, econometrica 77 ( 3 ), pp. 623 – 685. bis central bankers ’ speeches stall labour market recovery. 2 what was new was the attempt to measure general and event uncertainty through a variety of indicators, avoid the trap of reverse causation with the economic fluctuations it was trying to explain and insert the variable in a dsge model. professor bloom ’ s work on uncertainty inspired further research on the effects of uncertainty, including on the links between uncertainty and monetary policy. 3 for example, the idea that changes in uncertainty may interact with monetary conditions and can drive global financial cycles was one of the themes in this year ’ s jackson hole economic policy symposium, the annual gathering of prominent central bankers, finance ministers, leading academics and financial market players from around the world. 4 because of its latent nature, uncertainty is difficult to quantify and has to be measured indirectly using a variety of indicators. here, too, nicholas bloom, together with scott baker of stanford university and steven davis of the university of chicago, made an important contribution in developing an economic policy uncertainty index for the us, europe and other major economies. the measure has been used not only in academic papers but also by investors and financial professionals. 5 it has also been subject to intense discussions in the blogosphere in view of some of its political uses. the difficulties in finding good indicators controlled to avoid reverse causation and the use of political events provided fodder for the debates. professor bloom ’ s work on measuring uncertainty stimulated more systematic analysis of uncertainty indices also at the ec

closer to 20 %. country - specific shocks remain unsmoothed to a large extent, mainly because cross - border equity risk - sharing is hugely underdeveloped in europe. a true capital markets union could significantly help to diversify and reduce risk. it would thereby limit the financial burden to be levied by governments in the case of adverse shocks. and it would broaden the scope of monetary policy transmission beyond the banking sector, making policy less vulnerable. finally, to avert banking collapses, governments in the past were forced to disburse large sums of public money in the pursuit of economic and financial stability. completing banking union will reduce risks for taxpayers and break the remaining link between banks and national governments. a european deposit insurance scheme is a precondition for a truly integrated banking system and single money. let us not forget that 86 % of our money is created by commercial banks. the transmission of the ecb ’ s monetary policy will always be incomplete as long as differences in depositor confidence prevail across the euro area. the second line of defence relates to the role of governments. even the most flexible and efficient markets cannot fully absorb very large shocks without imposing economic hardship on a considerable number of people. in other words, flexible markets come at a price. they increase uncertainty for employees and often require relinquishment. uncertainty, for example, is born of the fear of a loss of employment or of not being able to respond to today ’ s fast pace of change. but it is also born of the fear that governments themselves have been pushed to the sidelines as globalisation has proceeded. recent election outcomes around the world bear witness to this fear. the more exposed individuals are, the more likely a political backlash. governments can mitigate these effects. unlike the united states, however, the european union is not a federation. this means that, as a rule, stabilisation and the provision of security in the form of social services takes place first at national level. keeping governments solvent is a precondition for achieving that. as we saw during the crisis, if perceptions of sustainability among markets decline, then counter - cyclical spending can quickly become constrained. so we need to regain fiscal space, which means building adequate national fiscal buffers. the current broad - based economic expansion is contributing a lot to this end. but many countries are emerging from the crisis still bearing legacy burdens that could take decades to resolve. this leaves us vulnerable to divergence and