in the euro area government debt crisis. next, i shall look at some historical episodes where sovereign contagion also played some role and see what we can learn from them. finally, before concluding i will refer to the ecb ’ s policy responses, and more broadly european policy responses, to contagion. the phenomenon of contagion : from research to policy broadly speaking, financial contagion refers to a situation whereby instability in a specific market or institution is transmitted to one or several other markets or institutions. there are two ideas underlying this definition. first, the wider spreading of instability would usually not happen without the initial shock. second, the transmission of the initial instability goes beyond what could be expected from the normal relationships between markets or intermediaries, for example in terms of its speed, strength or scope. ecb, “ the concept of systemic risk ”, financial stability review, december 2009. bis central bankers ’ speeches contagion is crucial for policy - making. this is in particular the case because it usually constitutes an externality, in the economic meaning of the term. the actions of economic agent a adversely affect the situation of economic agent b. these effects are external to the economic agent a but the economic agent b cannot make a pay for them. hence, the price mechanism will not solve the problem. there is a market failure that policy should try to address. in particular in financial markets, where many agents interact at high frequency, it is difficult for economic agents to get together and negotiate a contractual solution to the externality problem, as nobel laureate ronald coase has suggested in other contexts. 2 in the heat of a financial crisis this will undoubtedly be impossible. contagion as i have just defined it is, in principle, distinct from other forms of systemic instability, notably the unravelling of widespread imbalances and aggregate shocks causing simultaneous failures or crashes. but if imbalances or aggregate shocks already weaken the system, then the different transmission channels can interact and contagion may well become much stronger than in the absence of such additional vulnerabilities. 3 this is likely to be relevant in the present context, where many financial intermediaries have not as yet overcome their problems and fiscal deficits and debt levels are relatively high. it is probably fair to say that an inherent problem in the extant literature is that it is difficult to identify empirically the presence of pure forms of contagion. this identification problem is not unexpected, as there

mario draghi : twenty years of the european central bank ’ s monetary policy speech by mr mario draghi, president of the european central bank, at the ecb forum on central banking, sintra, 18 june 2019. * * * central banks were often established in the past with the aim of bringing stability in the aftermath of historic episodes. the bank of england was established during the sovereign debt crisis of 1690, when the government was unable to obtain funding in the market. the federal reserve was created after a series of panics that had rocked the us banking system in the late 19th and early 20th century. the euro was introduced 20 years ago in response to repeated episodes of exchange - rate instability and the need to secure the single market against competitive devaluations. the ecb was established as the keystone of the new economic and monetary union ( emu ). the first decade of the monetary union was characterised by calm macroeconomic conditions, with limited volatility and steady economic growth. the second decade, however, has seen profound shifts in the prevailing environment – including both financial and sovereign debt crises – and our monetary policy strategy has had to adapt with it. i would like to discuss this morning why this evolution came about and how it was achieved – and what the past twenty years can tell us about the ecb ’ s monetary policy in the future. monetary policy before the crisis the ecb ’ s mandate is given by the treaty as price stability. in 1998, the governing council defined price stability as inflation within a range of 0 - 2 % over the medium term, which constitutes the ecb ’ s objective. then, in 2003, the governing council clarified that, within this range, it would aim at a focal point of below, but close to, 2 %, which remains our medium - term aim to this day. this was a formulation that differed from the standard inflation - targeting framework of the time, which was typically based around a point target for inflation. but there were sound reasons why this definition was put in place. in common with central banks across the world, the ecb faced a macroeconomic environment before the crisis that was predominantly defined by low volatility and moderate shocks, with the distribution of shocks to inflation almost exclusively to the upside. in the euro area, hicp energy prices rose by 80 % between january 1999 and september 2008. under these conditions, establishing a strong reaction function against high inflation was seen as crucial to anchor inflation expectations. emphasising an