general news 06 june 2023 general “ bold, but realistic : monetary policy and financial stability ” © dnb “ europe will not be made all at once, or according to a single plan. it will be built through concrete achievements which first create a de facto solidarity. this bold, but realistic quote from robert schuman, one of the founders of the european union, today, also guides monetary policy and financial stability. ” in his keynote speech at the 5th capital markets seminar, jointly organized by the european stability mechanism, the european investment bank and the european commission, klaas knot discussed the current state of economic and financial affairs. date : 6 june 2023 speaker : klaas knot location : the 5th annual capital markets seminar, luxembourg city good morning everyone. today is june 6th. a date of tremendous historical importance. the day that, exactly 79 years ago, marked the beginning of the end of the second world war. a day that you could see as the beginning of what we now know as the european union. one of the founders of our union was robert schuman. he was born just a stone ’ s throw from where we are today – right here, in luxembourg city. what a bold man. a bold, but realistic man. “ europe, ” he said, “ will not be made all at once, or according to a single plan. it will be built through concrete achievements which first create a de facto solidarity. ” and indeed, looking back, there was no single plan. but what we do see, when we look back, are concrete achievements. like our hosts today : the european commission, the european investment bank, and the european stability mechanism. and what we also see, when we look back, is de facto solidarity. between people, between countries, and in concrete achievements like next generation eu. the esm is one of the youngest achievements in this very incomplete list. a mere 14 years ago, at the height of the euro crisis, we did not have the esm. we did not have a european mechanism in place to deal with economic and financial stability issues. but many of you here today realised that we needed one. and it is testament to you, and all those involved, that the esm has become, in a very short time, a cornerstone institution of the european monetary union. during the sovereign debt crisis, it was directly involved in successfully restoring market access to multiple euro area member states. one quick look at today ’

costs at extended maturities during the low - for - long era, this only partially and temporarily cushions the blow. and non - financial corporates face a similar situation. in the netherlands, for example, 38 percent of total debt of non - financial corporates will mature within the year or will have to be refinanced at a likely higher interest rate. higher interest expenditures might eventually also trigger some corporate liquidity issues. and alongside households and non - financial corporates, the debt sustainability of euro area sovereigns is also affected by the recent rise in bond yields. here too, the low - for - long era has partially been locked - in with fixed borrowing rates spanning a relatively long horizon. but this can only buy time rather than obviate the inevitable adjustment in the primary fiscal balance. so i urge caution. even though our financial system has proven its resilience, largely due to the buffers we have built since previous crises, and even though we have weathered the shocks of recent years, we mustn ’ t be complacent. building resilience does not prevent shocks from happening. it just helps us to deal with them. so it is encouraging that we as central bankers, in deciding on our course of action, have started to pay more attention to the interplay between monetary policy and financial stability. monetary policy affects the stability of the financial system. but in turn, we need a stable financial system to effectively transmit monetary policy. financial stability is a pre - requisite for medium - term price stability. and as chair of the financial stability board, i must underscore that a stable financial system is also a goal to be pursued in its own right. so where does that leave us? central bankers will have to continue tightening monetary policy for as long as necessary, until we see inflation return to our two percent target over the medium term. but we will do this step by step. because the tighter monetary policy gets, the more forceful its transmission to output and prices that is still largely in the pipeline. and with each step, the financial system will have to continue adjusting to the higher interest rate environment. the recent financial turmoil on the other side of the atlantic illustrates that this cannot be taken for granted. and with each step, we continuously learn from our experiences. allow me to share with you two valuable lessons we have learned in recent years. lessons that will help us walk this tight rope – step by step. lessons that will help us tackle future