sabine lautenschlager : fostering global growth speech by ms sabine lautenschlager, member of the executive board of the european central bank, at the panel during the g30 international banking seminar, lima, 11 october 2015. * * * i would like to thank jacob and jean - claude for inviting me to participate in this panel. you will not be surprised that i will focus on the growth challenge faced by the euro area countries in my intervention. let me stress from the outset that i believe that the euro area can make a much stronger contribution to global growth than it has done so far. but for this to happen, we need a stronger reform impetus in many euro area countries. to substantiate this claim, i would like to address two questions : first, where do we stand on growth and reforms in the euro area? and second, which structural reforms are still needed to support stronger and sustainable growth? where do we stand on growth and reforms in the euro area? growth has been recovering in the euro area, albeit at a modest pace. output growth has been gathering pace throughout 2014 and in the first half of 2015 and employment has been increasing. however, developments are still uneven across member countries and it is not clear that the recovery can be sustained in the medium term. our main concern is that across euro area countries domestic vulnerabilities are still very large, which implies a limited ability to withstand adverse external shocks and to kick start a new phase of sustainable growth. the vulnerabilities of many euro area countries are related to the high stock of debt, both public and private, and to a number of structural rigidities and institutional bottlenecks that prevent an optimal allocation of resources across factors of production, and thus limit total factor productivity growth. the current environment not only urgently calls for the implementation of structural reforms, but also provides the right conditions for their implementation. with our monetary policy, the ecb is greatly contributing to an environment favourable to implementing structural reforms : our accommodative monetary policy stance helps countries to gain time, time to implement the necessary measures to increase resilience and thus support sustainable growth. however, there is only a limited role for demand - side policies. fiscal space is limited and monetary policy cannot carry the burden of the adjustment alone. for the euro area to become more resilient and sustain stronger growth, national governments need to bring about further structural change 1. work in this regard has already started, and

their econometrica paper will be a benchmark in the literature on fiscal policy, and they now have a follow - up paper that adds the normative perspective. 10 their analysis – novel and more generally applicable – combines the new keynesian dsge framework with the incomplete - markets, heterogeneous - agent model of consumption and inequality. the resulting theory includes a realistic array of automatic stabilisers, such as unemployment benefits and progressive income taxes. the authors are able to quantify a number of mechanisms by which automatic stabilisers may work. one lesson is that unemployment benefits are especially effective in supporting aggregate demand in a recession. people who become unemployed reduce their consumption sharply, in particular if their period of unemployment is likely to be prolonged. moreover, those who remain employed increase their precautionary savings in a downturn as the probability of losing their job 2 / 4 bis central bankers'speeches rises. in this environment, more generous unemployment benefits have strong effects on aggregate spending. another takeaway is that – in the us data from the so - called great moderation period – automatic stabilisers appear to have played little role in smoothing out the business cycles, with monetary policy being much more important. that said, ricardo and alisdair show that automatic stabilisers can have more sizeable effects when the central bank is constrained by the effective lower bound on its policy rates.. in any case, the conclusion about automatic stabilizers having subdued effects opens up the debate about how to make them more effective and about the need in some situations to use discretionary fiscal stabilisation policy. recently, ricardo has worked on models in which the central bank ’ s balance sheet is explicitly present. such models are in demand in the wake of the global financial crisis, given the need to understand the effects of the expansion of the balance sheets of many central banks. ricardo has developed, together with robert hall, a framework to analyse central banks ’ solvency under “ new - style central banking ” and studied a model in which the interest rate on bank reserves is the main policy tool of the central bank. 11 as you know, besides his research activities, ricardo has also been an active participant in policy debates, notably concerning safe bonds for the euro area and economic developments in his native portugal. 12 ricardo ’ s work is macroeconomics at its best : in contact with data, innovative and with lessons for policymakers. please join me in congratulating ricardo on being awarded this