area have exceeded the 3 % reference value for the deficit ratio. under these circumstances, the stability and growth pact, which has been put in place to safeguard sound and sustainable fiscal positions, should be rigorously applied. the ecb calls to strengthen the governments ’ commitment to strictly adhere to its provisions. national policy makers should give fiscal consolidation top priority in the context of ongoing economic recovery, and bring the deficit ratio to below 3 % of gdp in line with the ecofin recommendations. based on the stability programme updates, governments appear to be on track this year, but further measures will be necessary in the coming years to correct excessive deficits within the set time horizon. as regards the composition of the fiscal adjustment, we welcome a focus on the expenditure side, because the size of the public sector has significantly increased in the crisis and because expenditure - based consolidation has proven to be more effective in the past. governments can enhance the credibility of fiscal consolidation by strengthening national budgetary frameworks and implementing structural reforms to increase potential growth. in this context, i welcome the european commission ’ s initiative for a europe 2020 strategy and the stronger role of the eurogroup in multilateral country surveillance which is overdue. at the same time, it is important that fiscal surveillance under the pact remains a process of its own right and that the fundamental principles of the treaty and the pact are fully preserved. a successful exit from the strong fiscal expansion in the wake of the recent crisis will require ambitious measures and a strong political will regarding implementation. i am confident that european fiscal policy makers will succeed in restoring the sustainability of public finances. the adjustment efforts undertaken by the irish government and more recently by the greek government can be seen as promising first steps in the upcoming consolidation process. policy responses to imbalances one of the main drivers of the financial crisis were the large global external imbalances. these imbalances implied massive capital inflows into deficit countries. those inflows had partly been financed by the issuance of financial instruments, whose value was shattered in the turmoil. the imbalances reflected a lack of medium - term orientation towards stability and sustainability of macroeconomic policies in key deficit and surplus economies. the euro area did not contribute to the build - up in global imbalances. its current account has remained close to balance over the years. the crisis has induced a partial reduction in global imbalances, but this correction appears to be largely cyclical. some important structural factors that led to unsustainable

left a harmful heritage in transmission, which heralded a third phase of crisis : banks in a vast portion of the euro area had lost their willingness and capacity to keep credit flowing to the real economy. borrowing conditions were being tightened precisely at the time when the economy was entering a new slump. this required further flexibility in our policy framework, articulated in three main instruments : a series of targeted longterm refinancing operations ( tltros ), a negative interest rate policy, and an asset purchase programme including private and public securities. the tltros offer banks long - term refinancing conditional on their using the funds to expand lending. the asset purchase program, together with a negative rate applied on excess reserves, quickens the pace at which banks and other lenders are returning to economic risk - taking. lower term spreads on public securities encourage a shift in the composition of banks ’ portfolios toward other types of exposures with a higher risk - adjusted return. finally, the tax on electronic reserves discourages liquidity hoarding and speeds up the process of asset reallocation. as a result of this series of measures, we are now seeing the bank - based transmission process 3 / 8 bis central bankers'speeches working more smoothly. banks have responded to the combination of measures by slashing their lending rates and shifting out their loan supply schedule. lending volumes are picking up gradually. and lending rates are easing considerably : between june 2014 and july 2016, the composite cost - of - borrowing indicator for new corporate loans fell by 95 basis points in the euro area and up to 150 basis points in stressed countries. the role played by monetary policy in supporting bank - based transmission has been confirmed by recent academic research. 2 in particular, studies suggest that the elastic provision of liquidity by the ecb earlier in the crisis – e. g. via the longer - term refinancing operations that started in december 2011 – was instrumental in counteracting the freezing of bank funding markets and in curtailing the risk of a credit crunch. the evidence also suggests that the shift in our policy strategy towards a more active support of bank lending has been successful. the combination of targeted longer - term refinancing operations and large - scale asset purchases has been found to have induced an increase in bank lending throughout the euro area, as well as a simultaneous reduction in the exposure of banks in stressed countries to their domestic sovereigns. this latter effect was not observable for the earlier, non