jens weidmann : how to address the euro area ’ s economic challenges? keynote speech by dr jens weidmann, president of the deutsche bundesbank and chairman of the board of directors of the bank for international settlements, at the 25th european banking congress, frankfurt am main, 20 november 2015. * 1. * * introduction ladies and gentlemen it is a great pleasure for me to speak to you. as i stand before you today, it ’ s hard to believe that a whole year has already gone by. i don ’ t think that there is any event i ’ ve attended more regularly – with the exception of the bundesbank ’ s presentation of its annual accounts. at last year ’ s event, i suggested that contemporary banking and medieval banking have as much in common as a ferrari and a donkey cart. what holds true for a subsystem of the economy certainly must hold for the economy at large. in terms of complexity and sophistication, today ’ s economy and its medieval counterpart are worlds apart. this, however, raises an obvious question. if the euro - area economy really is a sleek sports car, why has its performance been decidedly less than dynamic? is the engine sputtering? have the tyres lost pressure? does the body produce drag? the answer to these questions is : all of the above. the euro area ’ s growth engine is not firing on all cylinders. the euro area ’ s tyres have lost pressure – that is, europe ’ s banks have reduced their leverage. and although the lowering in the form of fiscal consolidation has been crucial to prevent the euro area from careening off the road, at the same time, the reduced ground clearance makes it harder to cushion bumps – meaning that it may become more difficult to respond fiscally to negative economic developments in the euro area. to counter all this, monetary policy in the euro area has put the pedal to the metal. it has lowered interest rates into negative territory, and it has embarked on large - scale asset purchases for most sovereign bonds. but while monetary policy has certainly provided a boost, growth is generally considered to be only moderate. so, what is needed to return to cruise speed? can we overhaul the engine for better performance? does it make sense to top up the tyres with air? should we try to eliminate the fiscal downforce? or should monetary policy try to push the needle even closer towards the rev limiter? in the next 20 minutes, i will explore these options

excessively prolonged period of low inflation is clearly not without consequence. it could place a strain on the sustainability of private and public debt in some countries and complicate the economic adjustment process for countries which have lost competitiveness. and if interest rates are near the lower bound, lower inflation might translate into a tighter monetary policy stance than warranted, in particular if longer - term inflation expectations are affected. but that is not the end of the story. what also matters is the nature of the inflation shock. at the moment, the sharp fall in energy prices is what is mainly driving the low rates. this drop has pushed down headline inflation by about one percentage point. correspondingly, the core inflation rate stands at 1 % and should gradually increase towards our definition of price stability, which is – let me remind you – a medium - term concept. crucially, the decline in oil prices is more of an economic stimulus for the euro area than a harbinger of deflation. lower oil prices reduce energy bills for both households and firms. that frees up financial resources which can then be put to use elsewhere – for consumption, investment or for reducing the debt overhang. all of this is good for the economies of the euro - area countries. at the same time, it seems that the downward risks stemming from international developments have increased somewhat. and uncertainty has risen more generally, as massive migration flows will also leave their mark on the economy. but while the quantitative effects of migration are hard to estimate precisely, it is safe to say that their impact on gdp will be rather stimulative over the projection horizon. all things combined, i see no reason to talk down the economic outlook and paint a gloomy picture. rather – and despite all this uncertainty – our forecasts were not far off the mark. in the end, we should also not forget that the monetary policy measures already taken still need time to fully feed into the economy. and we need to be aware that the longer we stay in ultra - loose monetary policy mode, the less effective this policy will become and the more the attendant risks and side - effects will come into play – take the exuberance in some financial markets and the problems faced by life insurers as examples. and we should not ignore the risk that fiscal policy could get used to the very low interest rates – leading to a situation in which consolidation efforts peter out and where monetary policy might come under pressure from governments to continue accommodation even if monetary tightening were called