peter praet : interview in the telegraaf interview with mr peter praet, member of the executive board of the european central bank, in the telegraaf, conducted by mr martin visser and ms dorinde meuzelaar on 12 december, and published on 20 december 2016. * * * how optimistic or pessimistic are you about the european economy? we see moderate but strengthening growth ; that is better than it was a while ago. the main welcome surprise is the increase in employment, which is boosting people ’ s disposable income. how can you call this a surprise? we have had to wait for more jobs for so many years. of course, that is a fair point. but that is because of the excessively high growth expectations before the crisis. in europe, there was a wide gap between overly optimistic expectations and reality. as a result, people were spending borrowed money. governments were not overly concerned about the sustainability of their debts. the cause of this expectation gap was a decline in productivity. sectors that had borrowed on the basis of excessive growth expectations ran into difficulties. and it then takes a long time to recover from the crisis? indeed. everyone needs time to bring their balance sheet back into shape. year after year, the ecb and the european commission ’ s projections were far too optimistic. you always thought that things would be better in the coming year. did that not fuel scepticism? perhaps. in 2011 the european economy found itself in a second recession. we did not see that coming, as most analysts didn ’ t. italy has even undergone three recessions. that explains why, eight years after the outset of the crisis, citizens are becoming impatient. but there is now a danger that they will be tempted by simplistic solutions. how much progress have governments made in restoring their economies? not enough. some countries have undertaken a number of reforms, greece being a case in point. but it had to make up so much lost ground that it is by no means finished yet. but there are also countries that are showing signs of reform fatigue. which countries are those? you see that everywhere. we will have to see what happens in 2017, but 2016 was not a good year as regards economic reforms. are you referring to italy and france? yes, but not only. some reforms have been made there in respect of pensions and the labour market, but there is still a large backlog

explicit role for financial conditions in monetary policy so far i have discussed the pre - crisis consensus view on monetary policy and asset prices from a general perspective. the events of the past two years have already generated farreaching reflections on this issue. 11 let me mention three avenues. first, the crisis has clearly demonstrated that the economic costs of the unravelling of imbalances can be overwhelming, notwithstanding extraordinary policy action – involving both monetary and fiscal policies. recent empirical research has explored more systematically the role of monetary policy in shaping the duration and depth of recessions. 12 when no distinction is made with regard to the nature of the downturn, expansionary monetary policy is found to be consistently associated with shorter recessions. however, when considering recessions that occur in combination with financial crises, monetary policy does not have a consistent effect on the duration of recessions. these results undermine confidence in one of the arguments buttressing the pre - crisis consensus view, namely that monetary policy can forestall the negative effects of the unravelling of financial imbalances. second, the crisis has highlighted the fact that asset price misalignments can have different consequences depending on the specific market in which they arise. it may well be true that, in periods of booms in asset prices, expected capital gains are so large that interest rate movements of a standard magnitude would not be sufficient to alter investor decisions. the origins of the recent financial crisis, however, are not in equity prices, but rather related to real estate and to the abnormal growth in securitised credit backed by residential or commercial properties. leveraged financial intermediaries have also played an important role in the recent financial crisis. in this context, recent research has highlighted the fact that even small changes in policy rates can have non - negligible implications for financial institutions, which tend to systematically finance illiquid long - term assets through short - term borrowing. even small changes in short - term interest rates can affect their profitability, forcing them to close some leveraged positions and, potentially, to partially correct any financial imbalances fuelled by such leveraged positions. 13 l. christiano, c. ilut, r. motto and m. rostagno ( 2008 ), “ monetary policy and stock market boom - bust cycles ”, ecb working paper no 955. see, for example, kohn ( 2008 ) and trichet ( 2009 ). see also white ( 2009 ). international monetary fund