ignazio visco : how to react to the fragmentation and the slowdown of the eu economy? opening remarks by mr ignazio visco, governor of the bank of italy, at the eurofi financial forum 2014, milan, 11 september 2014. * * * ladies and gentlemen, it is a pleasure to join jacques de larosiere in welcoming you here in milan. this event occurs at a crucial juncture for the european project and i hope it can be useful to shape our minds on what needs to be done. on my side, i will offer some thoughts on the current economic situation in the euro area and on the actions that are in my view most urgently needed. 1. economic situation in the euro area and the monetary policy response let me start by briefly recalling the latest macroeconomic developments. in the euro area recent data indicates that growth perspectives remain subdued and economic weakness is no longer confined to countries under stress. amid ongoing geopolitical tensions, the stimulus provided by exports may be losing momentum, while domestic demand continues to drag because of the contraction in gross fixed capital formation. confidence indicators worsened in recent months. among firms, the deterioration is particularly pronounced in the manufacturing sector, owing to the heightened uncertainty on world trade. households ’ confidence is affected by the persistently weak conditions in labour markets, with too high rates of unemployment in the euro area at large. the overall outlook is still consistent with a moderate growth of economic activity in the second half of the year, but downside risks have clearly increased. last week, the ecb revised downwards the projections of gdp growth for the next two years. since autumn 2013 inflation has been declining at a pace faster than expected, prompting continuous downward revisions of forecasts. in august the headline inflation rate was as low as 0. 3 percent in the euro area and has turned negative in a number of countries. declining inflation reflects not only the fall in energy prices, compounded by the past appreciation of the euro, but also the persistent weakness of the economy. core components are in fact proving to be increasingly sensitive to the prolonged slackness in domestic demand. medium - term inflation expectations have decreased markedly. at the end of august, based on inflation swaps, 1 and 2 year - ahead expected inflation rates were, respectively, at 0. 8 and 1. 1 percent ; only at horizons as far as 2022 does expected inflation appear to be consistent with the ecb definition of price stability. with declining, even negative, inflation rates

supply display some signals of improvement in lending conditions. the eurosystem bank lending survey shows that, in the second quarter of 2014, euro area banks, including italian ones, reported a net easing of credit standards on loans to enterprises for the first time since the second quarter of 2007. credit terms have been eased for households too, following a trend which started at the beginning of the year. while these signals are encouraging, there is still significant room for improvement as credit standards remain tight compared to the pre - crisis years, also in countries that did not experience any credit boom before the financial crisis. as mentioned, monetary policy is doing its part to reduce the cost of capital and secure more uniform credit conditions across the monetary union. an important contribution to sustain and accelerate the flow of credit to the economy will come from the tltros, as they contain specific built - in incentives for banks to on - lend to the private sector the funds obtained from the eurosystem. our own estimates for italy show that if banks fully took up the additional funding and passed on the cost advantage to borrowers, the beneficial impact on gdp could reach 0. 5 percent, a sizeable amount. the completion of banking union, including a smooth start of the single supervisory mechanism and a swift implementation of the single resolution mechanism, together with the continuation of an ordered process of balance sheet repair at european banks will help ensure the full functioning of credit markets. beyond banking union, it remains critical to address country - specific macroeconomic risks and vulnerabilities, such as weak competitiveness and current account imbalances, as well as to ensure sustained progress towards sound and sustainable public finances. reviving securitization reviving securitization has been long recognized as an essential complementary instrument and several initiatives have been debated ( also in a joint paper by the ecb and the bank of england ) to revive this market. in particular, it is necessary that simple and transparent securitizations be defined, and then promoted, in a consistent way across the eu. furthermore, a set of common rules applicable throughout the financial sector should aim to avoid arbitrage opportunities across financial intermediaries and types of securities. finally, more information on the characteristics of securitization and the underlying loans should be made available to investors. in order to achieve these objectives, there is now a need to agree on an eu - shared regulatory framework for high - quality securitization. bis central bankers ’ speeches developing