sabine lautenschlager : low inflation as a challenge for monetary policy and financial stability? speech by ms sabine lautenschlager, member of the executive board of the european central bank, at the parliamentary evening, hamburg, 7 july 2014. * * * summary although low interest rates might have side effects with respect to financial stability, they were necessary for the ecb to fulfil its mandate of ensuring price stability, said sabine lautenschlager, member of the ecb ’ s executive board, in a speech at an event organised by the deutsche bundesbank in hamburg. “ the risks of the rate of inflation being too low over a long period are not to be underestimated, ” she explained. the experience of japan had proven that an unanchoring of inflation expectations could start a downward spiral – consumers and investors could change their behaviour and defer spending. the ecb ’ s governing council had therefore cut the main refinancing rate and had decided on a package of instruments to encourage banks to lend more to corporations and households. excessively low inflation rates made it harder for stressed countries to adjust their economies and regain competitiveness. “ we [ could ] soon find ourselves in a vicious circle in the euro area ”, lautenschlager warned. it would take some time before the measures adopted took effect, especially the instruments designed to increase liquidity, she explained. “ i would expect that to happen next year, rather than this year. ” should inflation rates not increase gradually as expected, the governing council was unanimous in its readiness to decide on further unconventional measures to effectively counter the risks related to an excessively long period of low interest rates, said ms lautenschlager. a broadly ranging programme of securities purchases was basically an instrument that a central bank could use, lautenschlager claimed. but the requirement to be met for such a use had to be very high, because of the significant potential side effects, she said. what was also being discussed was a revitalisation of the market for asset - backed securities ( abss ), which lautenschlager regarded as a worthwhile goal to the extent that transparent and simple securitisations were involved. for such abss, a purchase programme would be possible, but the ecb should only take on liquidity risk and no credit risk. taking on credit risk, for example to encourage lending to small and medium - sized companies, was the responsibility

or of alternative policy choices would be. all this is conducive to public acceptance of the programme and, therefore, its success. and this is also in the enlightened self - interest of the government, as the electoral reward of the latvian prime minister demonstrates. beyond economic considerations, the adjustment programme has to be put into a broader context. political factors can also be key justifications for undertaking difficult economic measures. in the case of the baltics, the ultimate objective of adopting the euro also has a geostrategic dimension, namely completing their firm anchoring in a union based on freedom, democracy and human rights. in fact, sharing a currency is more than just drawing economic benefits ; it means being part of a community with a shared destiny. this project of political integration justifies making short - term sacrifices to join – or stay within – the euro area. to sum up, a speedy fiscal adjustment, a critical mass of structural reforms and a strong national ownership : these were, in my view, the key ingredients of the baltic recipe for a quick economic rebound. there is, of course, no silver bullet that could be applied universally to all countries. nevertheless, euro area policy - makers should look closely at the recent experience of the baltic countries and draw the appropriate lessons. i see at least one encouraging take - home message : if properly designed and effectively communicated, if fully supported by international lenders, economic adjustment does not necessarily imply political suicide. iii. lessons for latvia being here in riga, let me conclude with a few observations about the lessons for latvia itself. the end of the programme should not mean the end of the adjustment efforts. key challenges remain also for this country to ensure the sustainability of the fiscal adjustment, to strengthen the fundamental drivers of sustainable and balanced growth and to prevent macroeconomic imbalances from building up again. as regards euro adoption, the challenges that some euro area countries are currently facing illustrate clearly the importance of sustainable convergence. very careful preparation is required to make sure that convergence continues also after euro adoption. measures to reduce inflation temporarily or easily reversible measures to lower the fiscal deficit do not represent sustainable convergence. the decision to adopt the euro is a very fundamental one and should not be taken lightly. the ecb published its convergence report 2012 last week and we came to the conclusion that latvia does not yet fulfil all convergence requirements. so there is still a way to go for latvia and the euro will not come for free. but let