across all euro area countries. local factors to add to this, aggregate inflation has been dragged down by local factors linked to the sovereign debt crisis and the process of relative price adjustment in stressed countries. several euro area countries are currently undergoing internal devaluation to regain price competitiveness, both internationally and within the currency union. the crucial adjustments vis - a - vis other euro area countries have to take place irrespective of changes in the external value of the euro. this process began hesitantly in the early years of the crisis, largely due to nominal rigidities in wages and prices. the result was that adjustment took place more through quantities – i. e. unemployment – than through prices. stressed countries thus experienced a protracted period of declining disposable incomes and long - drawn - out price adjustment. in this context, several have seen domestic core inflation – that is, excluding the energy and food price effects i just described – fall well below the euro area average. for example, the recent overall fall in services price inflation for the euro area is almost entirely accounted for by price declines in these components in stressed countries. nevertheless, in the last few years relative price adjustment has accelerated in stressed countries. while this may also have initially weighed on disposable incomes, by creating a closer alignment between relative wage and productivity developments, it should increasingly support future incomes through the competitiveness channel. export growth has been impressive in several stressed countries. and indeed, nominal income growth in stressed countries turned positive in the fourth quarter of 2013. the physiology of disinflation so to sum up : falling energy and food prices, coupled with the effects of relative price adjustment in stressed countries, explain almost fully the disinflation we have seen in the euro area. we also see that disinflation produces counterveiling forces, which may in time cause it to self - correct. to what extent should monetary policy therefore react to these developments? the answer relates to the physiology of inflation : whether or not these factors are likely to persist into the medium - term and therefore enter the horizon of monetary policy. temporary movements in the exchange rate or relative price adjustments would not normally warrant a monetary policy response. given the lag in monetary policy transmission, a monetary impulse would hit the economy just when the effect on inflation has faded out and the impulse is no longer necessary. that said, shocks can change : in certain circumstances temporary shocks can morph into persistent shocks via second - round effects. in particular

nominal income results in a higher actual and expected future real debt burden. unless compensated for by expectations of higher future income, firms may reduce investment and households consumption. banks may in turn respond to this situation with stricter credit standards, which reinforces disinflationary pressure and hence worsens debt burdens. this is fertile ground for a pernicious negative spiral, which then also affects expectations. propagation through the euro area so do we see any signs that low inflation might propagate through the euro area in this way? on aggregate, euro area firms and households do not seem to be particularly exposed to debt deflation dynamics. the interest payment burden of euro area firms – the ratio of their gross interest payments to gross operating surplus – has actually fallen from 22 % in 2008 to less than 12 % at the end of 2013, which suggests that firms are in a stronger position today to withstand a period of low inflation. for euro area households debt service - to - income ratios are similar – around 14 % – while the median household holds the equivalent of around two months ’ income in liquid assets to cushion nominal income shocks. but importantly, this picture masks the heterogeneity mentioned previously. for firms in some countries the interest payment burden has in fact risen since 2008, in particular for firms based in stressed countries. debt service - to - income ratios also tend to be higher in stressed countries, implying greater vulnerabilities in these jurisdictions if low inflation persists. bank lending also presents a mixed picture. surveys of bank behaviour show a gradually improving aggregate situation. according to the latest bank lending survey credit conditions generally stabilised at the start of this year, and even improved in some stressed countries. the incremental tightening process that banks reported throughout the crisis seems to have come to a halt. bis central bankers ’ speeches that said, credit conditions remain very heterogeneous across countries and sectors. according to the latest ecb survey on credit access by small - and medium - sized enterprises ( smes ), supply constraints remain especially strong for smes in stressed countries. the percentage of financially constrained but viable smes – i. e. those with positive turnover in the last six months seeking a bank loan – varies from a minimum of 1 % in germany and austria to a quarter of the total population in spain and as much as a third in portugal. importantly, credit weakness appears to be contributing to economic weakness in stressed countries. to show this, one can undertake a quantitative