in particular weigh on the debt servicing capacity of highly indebted corporates. for these firms, any potential downside surprises in growth could result in subdued earnings, which could further affect debt servicing capacity. real estate firms remain particularly vulnerable to losses stemming from the downturn in euro area real estate markets. the ongoing downturn is particularly acute in the euro area commercial real estate market, where both activity and prices declined sharply in 2023. on both sides of the atlantic, the effects of higher interest rates on this sector have been compounded by structurally lower demand for some real estate assets following the pandemic. some non - banks and specialised banks remain heavily exposed to interest ratesensitive sectors, such as highly indebted corporates and real estate. further deterioration in these sectors could expose intermediaries to revaluation losses and investor outflows. this is especially relevant for open - ended investment funds with mismatches between asset liquidity and redemption terms, including real estate investment funds with a large market footprint in commercial real estate markets in several euro area countries. low levels of liquidity raise the risk of forced asset sales if macro - financial outcomes deteriorate. 2 / 5 bis - central bankers'speeches in fact, despite some recent portfolio rebalancing by non - banks, the sector is still showing high duration, credit and liquidity risk. entities remain vulnerable to asset price corrections amid macroeconomic uncertainty and volatile markets. parts of the nonbank financial sector also have significant leverage on and off - balance sheet. fragilities in the sector pose risks to the financial system, also due to its links to the banking sector. banks and non - bank financial institutions can be closely interconnected through funding channels, ownership linkages and common risk exposures. in contrast, the euro area banking system has been a source of resilience, with solid capital and liquidity buffers on the back of strong regulation and robust supervision. bank profitability has strengthened in recent quarters, supported by higher interest rates that compensated lower lending volumes. however, weak lending growth, rising funding costs and deteriorating asset quality are likely to pose downside risks to profits in the future. while asset quality indicators have been quite robust, there are early signs of deterioration in some loan portfolios, including smaller firms and sectors such as construction and commercial real estate. nonetheless, the current environment of macroeconomic uncertainty shows the importance of remaining vigilant – banks should be prepared for a possible worsening of

me add that the best way of anchoring price stability in economic agents ’ decisions is through an independent and accountable central bank. german history provides the best possible example of this. turning to other factors which are particularly relevant for the proper functioning of the euro area, welldesigned structural reforms that enhance flexibility in product and labour markets are crucial. this is helping to better absorb shocks and thereby improve the working of adjustment mechanisms in individual countries, regions or sectors. in this context, the lisbon strategy is a fundamental and ambitious programme to draw europe ’ s attention to the urgency of structural reforms. such reforms would improve long - term growth prospects in the euro area by, on the one hand, affecting positively labour participation and, on the other hand, improving labour productivity growth through the promotion of innovation and technological change. needless to say, the responsibility for the implementation of reforms is in the hands of national governments, of parliaments and of social partners. we know very well that structural reforms may face both resistance from economic agents and different sensitivities in public opinion. this is why it is extremely important to communicate the fact that the medium to long - term benefits of structural reforms will significantly outweigh any short - term cost. we therefore strongly support governments in their implementation of structural reforms and we consider our duty to stress and explain their benefits. what factors may help to increase flexibility within the euro area? economic flexibility can be promoted by removing the institutional barriers to flexible wage and price - setting mechanisms. if wages and prices are flexible enough and be able to adjust to the changes in the economic conditions, then this will help to avoid unwelcome fluctuations in unemployment. specifically, in a monetary union most of the adjustment has to take place through national labour markets. therefore, wage setting should appropriately reflect the different situations of sectors, of firms and of overall labour market conditions. let me stress that governments and social partners share responsibility for ensuring that wage determination sufficiently takes into account labour market conditions and does not jeopardise competitiveness and employment. governments should also be aware that wage setting in the public sector can serve as a role model for the private sector. and social partners need to take into account from ludwig erhard “ prosperity through competition ” ( wohlstand fur alle ), chapter 12 “ welfare state – the modern delusion ” ( versorgungsstaat – der moderne wahn ), london 1958. the different conditions at the firm and sectoral level,