##b have gained us time ; they have preserved the functioning of monetary policy. bis central bankers ’ speeches but we have now reached a point where european integration, in order to survive, needs a bold leap of political imagination. it is in this sense that i have referred to the need for a “ growth compact ” alongside the well - known “ fiscal compact ”. a growth compact rests on three pillars and the most important one, from a structural viewpoint, is political : the economic and financial crisis has challenged the myopic belief that monetary union could remain just that, and not evolve into something closer, more binding, into an arrangement whereby national sovereignty on economic policy is replaced by the community ruling. if the governments of the member states of the euro define jointly and irrevocably their vision of what the political and economic construct that supports the single currency will be and what the conditions to reach that goal together should be. this is the most effective answer to the question everyone is asking : “ where will the euro be in ten years ’ time? ”. the second pillar is that of structural reforms, especially, but not only, in the product and labour markets. the completion of the single market and the strengthening of competition are crucial for growth and employment. labour market reforms that combine flexibility and mobility with a sense of fairness and social inclusion are essential. growth and fairness are closely connected : without growth, and the events of recent months also reflect this, the temptation to “ circle our wagons ” gains strength, and solidarity weakens. without fairness, the economy breaks up into multiple interest groups, no common good emerges as a result of social and economic interaction, and there are negative effects on the capacity to grow. recent italian history has no shortage of examples. these reforms have long been indispensable in a global economy very different to the one which witnessed the creation of the institutions still operating today. in the political structure that will emerge from the crisis it is likely and desirable that for these reforms a system of european rules will be introduced similar to that for the fiscal compact, a discipline leading over time to the european harmonisation of objectives and tools. the third pillar is the revival of public investment : the use of public resources to push forward investment in infrastructure and human capital, research and innovation at national and european levels. ( the proposed strengthening of the eib and the reprogramming of union structural funds in favour of less - developed areas go in this direction ). thus, a growth

wholesale market funding. the fragmentation of the interbank market and sharply rising yields in some countries impaired the transmission of monetary policy and threatened the unity of monetary policy throughout the euro area. credit to the private sector contracted and the euro area entered a further recession, with unemployment peaking in early 2013 at just over 12 %. the output gap – the difference between current levels of economic activity and its long - run potential – reached a position well into negative territory. 1 / 5 bis central bankers'speeches additional factors weighing on inflation beyond the downward pressure on inflation from domestic sources, a number of other factors also weighed on inflation. in particular, energy and other commodity prices fell sharply from the middle of 2014. headline hicp inflation turned negative in december 2014. our mandate is to maintain price stability over the medium term, so short - term movements in volatile components of the index do not necessarily require a monetary policy response. indeed, the full transmission of monetary policy to inflation takes more than a year, but the initial impact of energy price changes no longer has an effect on the annual inflation rate after a year. so there is a real risk that any monetary policy action might only take effect when the main impact on headline inflation has already passed. as such, monetary policy could exacerbate volatility in inflation. conversely, there is a risk that movements in headline inflation caused by a succession of energy price shocks could become entrenched in wage bargaining and inflation expectations. inflation expectations drifting away from our objective interferes with monetary policy ’ s ability to meet that objective. as a result, monetary policy typically reacts to energy price movements by “ looking through ” their first - round, direct impact, but remaining vigilant regarding any secondround effects on expectations. this is certainly a description that fits the actions of the ecb at the time. while the domestic recession and falling energy prices are the major underlying reasons for the low rates of inflation recorded since 2014, there are a number of additional contributory factors, including the flow - through of generally weak global demand and certain industry - specific factors. i won ’ t detail them today, except to mention that the european system of central banks has carried out a significant body of research on the subject, which was published last week. 1 decline in equilibrium interest rates economists use a concept called, variously, the equilibrium real rate or the natural rate. it represents the interest rate at which there is neither upward nor downward pressure on economic activity and hence on inflation. broadly