measures currently in place in the euro area follow from this : they were decided as a direct result of a euro area inflation rate well below comfortable levels and persistent weakness in the economy. and in meeting our objective, we support growth and inflation, which in turn creates the conditions for interest rates to “ normalise ” once more. of course, the level that rates will return to in the future is dependent upon the degree to which the secular drivers, currently depressing rates, can be reversed. challenges of the low interest rate environment let me start, however, by briefly touching on the challenges the current situation poses for the pension fund sector, as well as for the insurance sector given its similar focus on fixed income assets and the prevalence of long - term liabilities. large euro area insurers show quite reasonable profitability, 1 albeit the aggregate picture masks substantial heterogeneity see ecb ( 2015 ), “ financial stability review ”, may. bis central bankers ’ speeches across countries and types of business. small and medium - sized, non - diversified life insurers with high policyholder guarantees are typically highly exposed to low yields and have found their business models more under pressure. for pension funds the impact of low interest rates is strongest on those maintaining defined benefit schemes. the challenges for the insurance sector were underscored by the mixed performance in the stress test undertaken in 2014 by the european insurance and occupational pensions authority ( eiopa ). 2 while the top 30 european insurers all fulfilled the solvency ii requirements in the baseline scenario, 14 % of participants – mainly small firms representing 3 % of total assets in the sample – did not do so. the similar exercise currently being conducted by eiopa for pension funds will provide valuable insights into the strengths and vulnerabilities of the sector in the current market environment, an issue for which, at present, data is relatively scarce. the challenges, however, are not limited to the sectoral level. how insurance companies and pension funds adjust to the low interest rate environment could also have wider implications. with total assets of over €9 trillion, the strategies they employ to cope with low investment returns could clearly have spillover effects both to financial markets and the broader economy. one dimension of adjustment that could be relevant here is related to reallocation of portfolios towards higher return assets. “ healthy risk - taking ” – to borrow a famous expression coined by ben bernanke – is at the very heart of monetary transmission.

budgetary policies accordingly, policymakers started heavily criticising the pact, arguing that it was inflexible and set the wrong incentives. in the end, it was the rules – and not the policies – that were adjusted. in march 2005 the council agreed on a reform of the pact. changes to its corrective arm, which seeks to deter countries from running excessive deficits and ensure their prompt correction, have considerably weakened the eu ’ s fiscal framework by placing greater emphasis on flexibility and discretion. the improvement seen in member states ’ fiscal positions since the new pact was adopted is attributable largely to the recent cyclical upswing, while progress with structural consolidation in countries with budgetary imbalances has generally been disappointing. this lack of ambition as regards fiscal consolidation, which is not consistent with the provisions of the revised stability and growth pact and falls short of the political commitments made, could potentially undermine the credibility of the new pact. the real test of the new pact ’ s credibility is still to come, but the indications, particularly from some large member states, are not very encouraging in this regard. in addition, also wage policies have often not taken sufficient account of the requirements of the new environment – the fact of having a single currency. in some countries, wage growth has considerably outpaced productivity growth, leading to considerable increases in unit labour costs. such developments have, in turn, led to significant deteriorations in the cost and price competitiveness in these countries, which will require some sort of re - equilibrating wage adjustments in the future. a quick glance at the facts thus reveals that there is a need for better coordination of national economic polices in the euro area. but it would be a mistake to infer from this that there is a need for some kind of economic government for the euro area. the economic policy provisions of the treaty and the eu ’ s framework for economic policy coordination do, in principle, ensure the sound conduct and coordination of economic policies, promoting economic prosperity in the countries of the euro area. the reasons for the lacklustre performance of many euro area countries ’ economic policies are rooted not in deficiencies in the current institutional framework, but rather in some national governments ’ lack of willingness to adhere to the rules of that framework. as national governments obviously lack the political will to coordinate their economic policies and adhere to the rules of emu, could an economic government make a difference? this would potentially involve the transfer to a european institution of national