a point where the path of inflation is expected to be self - sustaining, but longterm unemployment remains high, there should be no doubt as to how i would decide regarding our policy stance. monetary policy cannot “ run the economy hot ” as insurance against labour market risks – that is, the risk that long - term unemployment becomes structural unemployment. this would be neither desirable in view of our primary mandate, nor efficient given the euro area circumstances. it will be up to other policymakers to tackle this issue – as they must. 1 i would like to thank v. jarvis and e. lis for their contributions to this speech. i remain solely responsible for the opinions contained herein. 2 see summers, l. ( 2014 ), “ u. s. economic prospects : secular stagnation, hysteresis, and thezero lower 8 / 9 bis central bankers'speeches bound ”, keynote address at the nabe policy conference, 24 february 2014. 3 see, e. g., ball, l. ( 2014 ), “ long - term damage from the great recession in oecd countries ”, nber working paper no. 20185. 4 participation rates have fallen for the under - 25s and remain some way below their pre - crisis levels – in part reflecting higher enrolment rates, as young people exercise their “ outside option ” of staying in education in the face of less advantageous labour markets. 5 the level expected to prevail in 2015. 6 the picture changes little when hourly wage growth is considered, with annual rates ranging from 1. 0 % to 1. 3 % over the course of the recovery. yet, it picked up more strongly in the last two quarters of 2016, standing at 1. 8 % in the last quarter of 2016. 7 see ciccarelli, m. and c. osbat ( 2017 ), “ low inflation in the euro area : causes and consequences ”, ecb occasional paper no 181. 8 see blanchard, o., e. cerutti and l. summers ( 2015 ), “ inflation and activity – two explorations and their monetary policy implications ”, imf working paper no 230. 9 staiger, d., j. stock and m. watson ( 1997 ), “ the nairu, unemployment and monetary policy ”, journal of economic perspectives, 11 ( 1 ) : 33 - 49. 10 see the recent economic bulletin box entitled “ assessing labour market slack ”,

period of low demand ultimately affected long - run potential growth. i would call this an “ anxiety trap ” that could ultimately lead to the more subtle forms of hysteresis i mentioned earlier. the reason is that if the effect of low expectations and high uncertainty is to quell animal spirits, large demand shocks can have long - lasting effects : the increase in risk aversion slows down capital accumulation, thereby reducing productivity growth, while uncertainty encourages firms to enter into more flexible forms of employment that shed labour market risks onto workers. this then feeds back into wage growth in three ways : ( i ) through lower labour productivity, which depresses real wages, ( ii ) through a higher level of effective labour market slack and ( iii ), in an environment of high uncertainty, through employees and trade unions valuing job security more than higher wages – in particular after recessions where wage growth would likely have been negative for a while had it not been for downward nominal wage rigidity. put differently, what we could be seeing today is a hysteresis in the euro area economy that has an effect on wages quite unlike that of “ traditional ” labour market hysteresis. the issue might not be so much that fewer “ insiders ” may be able to push aggregate wages up – which was a key insight of blanchard and summers ’ earlier work. it is rather that hysteresis may be affecting labour markets through employers ’ risk perceptions and subsequent hiring and investment choices, which have so far had the contrary effect of pushing wages down. but while this form of hysteresis might leave some workers working less than they would like, they remain – by and large – attached to the labour market. and by retaining their professional network and skills, they are less likely to become marginalised and, on aggregate, structural unemployment is less likely to become entrenched. this is what i mean when i say that the crisis may have caused scratches, but not necessarily scars. still, while the labour market has proven surprisingly resilient to the repercussions of the doubledip recession, the perils of hysteresis – of real scars – remain : you can see on slide 6 that longterm unemployment as a share of total unemployment has increased from levels around 45 % before the outbreak of the crisis to 50 % today and has barely declined in recent years. in other words, one in every two of the more than 15 million currently unemployed face the risk of becoming