has been introduced and the fiscal backstop for the srf has increased in size. while there is political agreement about the srf backstop and its terms of reference, there is not yet agreement on the european deposit insurance scheme. second, it is imperative to accelerate progress on the capital markets union. this is ambitious. it entails streamlining core aspects of national policies, such as taxation and insolvency regimes, 3 / 4 bis central bankers'speeches which are essential for integrating the legal underpinnings of cross - border markets. capital markets can smooth country - specific shocks by providing a larger pool of financial assets that can be shared across borders. this helps to decouple wealth and income – and hence consumption – from output. conclusion let me conclude. the euro area risk outlook is again tilted to the downside. this is a conjunctural concern. the global decline in the natural rate of interest over the past quarter of a century, however, poses structural challenges. policy rates will likely remain low, by historical standards, and may hit their lower bounds more frequently than in the past. 7 we have learned from the experience in japan that it is possible to get caught in a vicious cycle of declining inflation expectations, falling inflation and a binding lower bound on nominal interest rates from which it is difficult to escape. it is thus of utmost importance that we enhance the firepower of euro area stabilisation policy by means of a policy mix that, while continuing to make full use of monetary policy, assigns a more substantive role to fiscal stabilisation policy. laying the institutional foundations for a european fiscal capacity would be an important step in this direction. 1 see coenen, g. ( 2003 ), “ zero lower bound : is it a problem in the euro area? ”, working paper series, no 269, ecb, september. 2 schmidt, s. ( 2013 ), “ optimal monetary and fiscal policy with a zero bound on nominal interest rates ”, journal of money, credit and banking, vol. 45, no 7, pp. 1335 – 1350 ; and werning, i. ( 2012 ), “ managing a liquidity trap : monetary and fiscal policy ”, nber working paper series, no 17344, national bureau of economic research. 3 eggertsson, g. ( 2011 ), “ what fiscal policy is effective at zero interest rates? ”, in acemoglu, d. and woodford, m.

policy can act to stabilise the economy. but for idiosyncratic shocks, stabilisation becomes trickier. monetary policy cannot target individual countries, and those affected can no longer adjust their exchange rate to help cushion the effects of the shock. hence the literature emphasises the need for economic cycles to converge, so that common shocks generally dominate. for asymmetric shocks, stabilisation comes ex ante from greater cross - border risk - sharing to improve resilience, and ex post from fiscal policy. but in the light of recent experience, it is worth revisiting this classic separation between using 1 / 4 bis central bankers'speeches monetary policy for common shocks and fiscal policy for asymmetric shocks. fiscal policy at a national level in the euro area was unable to fully counter asymmetric shocks during the crisis. and at an aggregate level, stabilisation may benefit from monetary and fiscal policy working in tandem given the current environment of low interest rates. nominal interest rates have been declining in advanced economies since the 1980s. in large part, this decline is attributable to the decline in average inflation over that period. investors require lower compensation for expected future inflation, and the fall in inflation volatility has also reduced the inflation risk premium. the decline is also a result of a secular fall in the natural rate of interest, which is the rate that balances desired saving and investment in the economy. while the natural rate cannot be precisely measured, a range of estimates point to its decline. there are a number of contributing factors to this decline, principal among which is lower potential growth. lower potential growth reduces the expected rate of return on capital, so reduces the rate at which firms are prepared to borrow to invest. other factors that are believed to have further weighed on the natural rate of interest include the ageing population in europe, the role of income distribution, increased saving in emerging markets and a general rise in risk aversion. this fall in the natural rate of interest has important implications for the optimal policy mix in the euro area. the interest rate at which monetary policy becomes accommodative falls directly in line with the natural rate, so the effective lower bound on nominal rates has become a much greater consideration when setting policy. before the crisis, it was estimated that interest rates in the euro area would be likely to hit zero only once every 50 years. 1 at the current natural rate, rates of zero or below are likely to be a much