i will focus instead on an area where there is more still to do to create the conditions for sustainable long - run growth – that is, structural reforms in the euro area. the main point i would like to make is as follows. for many euro area countries structural reforms are central to higher long - run growth. and that each economy achieves this is in turn critical to an efficient implementation of monetary policy and, over time, to the integrity of monetary union. but there is no “ one size fits all ” model for how countries should go about tackling structural challenges. while there are principles that apply across countries, each economy is different and reforms have to be tailored to national conditions. as a central banker, my interest is therefore not in how countries go about strengthening their economies. this is for governments individually and collectively to decide who know their national challenges best. my interest is in whether they succeed in doing so, due to the impact this has on price stability and on the cohesion of the union as a whole. in the remainder of my remarks i will elaborate on these points, focusing on the two main channels through which structural reforms can support long - run growth in the euro area. bis central bankers ’ speeches increasing adjustment capacity the first is through increasing the adjustment capacity of the economy. this means two things : first, that output is less affected by shocks because relative prices adjust quickly ; and second, that the recovery in output is faster because the economy is able to reallocate resources in a more efficient way. adjustment capacity is important in itself, but it also supports long - term growth insofar as it reduces the depth of recessions and the duration of unemployment, lessening labour and capital hysteresis. when countries do not have an independent monetary policy and exchange rate, as in the euro area, the ability to adjust to shocks in this way becomes commensurately more important. to avoid large increases in unemployment it is crucial that national institutions can facilitate a smooth adjustment process. in other words, the need for a higher degree of “ resilience ” comes automatically with membership of a monetary union. while this is first and foremost a national responsibility, it is also of common interest in a monetary union. if some members consistently rebound more slowly from shocks than others, it complicates the achievement of price stability at the euro area level. the risk also increases that differences in structural unemployment become entrenched across the union. and insofar as this weaken

their mutual interaction, produce strong amplification effects. this has been luminously shown by danielsson and shin in their seminal article on " endogenous risk ", based on the now famous parable of the millennium bridge. extreme events and modern finance with slight exaggeration, a case can be made that modern finance has been built, in practice, if not in theory, on implicit tolerance and widespread ignorance of extreme events. the use of models models are extensively used to assess risks and price assets. nearly all models are based on the prevalence of " normal " ( gaussian ) distribution as the basic tool. this means that abrupt changes in prices or risk have a very low probability. the fallacy of this assumption has been clearly shown by mandelbrot for stock prices, and it has been further demonstrated in many recent ( and non recent ) episodes for other asset prices and risk premia. examples of the use of normal distribution in financial modelling would include the following : • the most frequently used tool for risk measurement ( var ) frequently ignores " fat tail " risks. many var measures are calibrated according to the expected loss of a portfolio under normal circumstances. models with " fat tail " distributions are available, but seldom used, due to lack of reliable data over a sufficient period of time. • implied volatilities are usually extracted from option pricing, based on normal distribution. they are then used as inputs into trading strategies and models. as a result, the assumption of normal distribution widely " contaminates " the pricing, risk assessment and investment strategies across a whole range of markets and instruments. • finally, the pricing of many structured products is based on historical correlations among asset prices, with the assumption that those correlations are stable and do represent the ordinary state of nature. on the contrary, experience has shown that those correlations can change radically during a crisis, frequently collapsing to one, and take price movements to the extreme ends of the probability distribution. procyclicality many changes have been introduced in recent years to accounting and capital regimes in order to make them more risk sensitive. the benefits in terms of increased transparency and better risk management are very significant. those same changes, however, may contribute to create new amplification mechanisms inside the financial system. this is referred to as a " procyclicality " issue, by which we usually mean the tendency of financial system to accentuate fluctuations in real and financial variables around their trend. but