“ the ecb ’ s strategy review against the background of the covid - 19 crisis ” speech by governor knot at the euro50 group videoconference 15 october, 2020 ( i ) setting the stage in my remarks, i want to take a look at current efforts by central banks to review their monetary strategies. i will do this from a euro area perspective. to set the stage, let me describe how the macroeconomic environment in which central banks operate has changed markedly since 2003, when the ecb last reviewed its monetary strategy. this was the motivation for the ongoing review. the main changes include : 1. the fall in the natural real rate of interest, often called r - star. while notoriously uncertain and dependent on modelling assumptions, estimates of the equilibrium interest rate have declined visibly since the early 2000s ( see chart 1 ). 2. the significant decline of different measures of inflation over the past decade, and particularly since 2014, associated with lower trend inflation and higher inflation persistence ( see charts 2 - 3 ). 3. the broad increase in uncertainty, including on : • the nature of shocks hitting the economy ; • the effectiveness and transmission of our policy tools ; • how agents form expectations of the future and whether their long - term inflation expectations are well - anchored to the central bank ’ s inflation aim ; and more. the decline in inflation, which is the main variable of interest for monetary authorities, is particularly noteworthy. during the great recession, we used to talk about the “ missing disinflation puzzle ”, while between 2014 and 2019 we discussed at length the “ missing inflation puzzle ”. a flatter philips curve might be one explanation for both. but the policy debate and in academic research have shown that the decline in inflation can also been explained by other factors, or other narratives. one such plausible narrative for low inflation is a phillips curve that is alive combined with a fall in trend inflation. this downward trend arguably reflects structural but not necessarily secular factors in the global economy – most notably globalization, digitalization and demographics. although there is no consensus on their relative importance, it is clear that central banks have only incomplete control over the disinflationary impact of these factors. ( ii ) the covid - 19 shock it is in this evolving environment, in which the ecb strategy review has been ongoing, that covid - 19 hit like a meteorite. the covid - 19 shock is an unprecedented, truly exogenous, global shock with markedly different sector

the stability and growth pact. the crisis has revealed some of the shortcomings of national policies to comply with the requirements of an economic union. in particular, in a number of cases, national policies that are responsible for domestic public finances and for the competitiveness of member economies have not achieved their objectives. but the crisis has also revealed weaknesses in the peer surveillance process and in the implementation of the stability and growth pact. thus another major lesson of the crisis is the need to strengthen the institutional framework of the economic union. of course, the deterioration of public budgets has partly been due to a “ migration ” of risk from the financial sector to the public sector. public budgets have been called on to absorb the excessive risk that the financial industry had been creating during the booming years that led up to the crisis. partly, however, the deterioration of public budgets is also due to some short - sighted fiscal and economic decisions in the brighter times that preceded the crisis. before the crisis, weak public finances had combined in some countries with inattention to domestic competitiveness and a lack of long - term strategies to prepare national economies for competing successfully in the challenging – but rewarding – environment of the internal market. in greece, in particular, past fiscal irresponsibility and inattentiveness to domestic competitiveness made the national economy extraordinarily vulnerable to a sudden turn in confidence. as i have implied, after the crisis, the main players in the world economy will be judged by a new yardstick. private players will be held accountable to new and stricter standards of economic integrity and prudent management. and governments, the world over – and in europe in particular – will have to show self - discipline and trustworthiness to gain respect and preserve confidence. that is why financial reform will have to go hand in hand with fiscal reform. fiscal reform will reinforce confidence. in the current situation, we have to – and we do – stand firm on these principles. speculation on more and more elevated sovereign risk has been one factor behind spreads being driven to very high levels. this is why it was very important that the heads of state and government declared on 11 february 2010 that they were ready to “ take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole ”. i said, on behalf of the ecb, that i approved of this important statement. in this respect let me stress the following : loans are not transfers, and loans come at a