mario draghi : participation of the president in the portuguese council of state introductory remarks by mr mario draghi, president of the european central bank, at the portuguese council of state, lisbon, 7 april 2016. * * * president of the republic, president of the assembly of the republic, prime minister, president of the constitutional court, honourable members of the council of state, i am grateful for the opportunity to discuss with you today the state of the euro area and the changes that still lie ahead of us and i would like to thank the president of the republic for inviting me. on my way here i passed by the tejo river and the tower of belem. the place where five centuries ago the first maritime explorers set sail for often uncharted waters, looking for new opportunities. portugal and its people have also been going through uncharted waters and facing important challenges in recent years, as has the rest of europe. during the past couple of years, economic headwinds have swept through portugal and the euro area at large. however, we are seeing signs of recovery. nevertheless, important challenges remain as the euro area continues to be weighed down by low potential growth and high structural unemployment. in my remarks today, i will consider the state of the euro area recovery, the role of monetary policy and finally the steps needed to strengthen the euro area and the eu. the state of the euro area the euro area recovery is currently proceeding at a moderate pace. it is supported by our monetary policy measures and their impact on financial market conditions, as well as by the low price of energy. yet, investment across the continent remains weak, as heightened uncertainties about the global economy and broader geopolitical risks are weighing on investor sentiment. the recovery is also taking hold in portugal : its economy is currently growing at the same pace as the euro area as a whole and unemployment is on a clear downward trend. yet, the signs of the euro area and portuguese economic recovery should not be an indication that we can rest on our laurels. the euro area as a whole only just managed last year to return to the levels of economic activity seen before the crisis and some countries, among them portugal, are still not there. and our economies are still marked by significant vulnerabilities which need to be swiftly addressed. one key issue in this respect is youth unemployment, as it prevents young people from playing a full and meaningful part in society. indeed, despite being the best - educated generation ever, today

entertainment, and tourism and travel. output losses and the expected recovery will be significantly more uneven across sectors than in previous crises, as a result. the pandemic has amplified existing vulnerabilities in the euro area financial system fiscal support has played a key role in mitigating the impact of the pandemic on the economy and preserving productive capacity. this is very welcome, notwithstanding the sizeable budget deficits anticipated for 2020 and 2021 and the rising levels of sovereign debt. while policy support will eventually need to be withdrawn, abrupt and premature termination of the ongoing schemes could give rise to cliff - edge effects and cool the already tepid economic recovery. loan guarantees, tax deferrals and direct transfers have alleviated immediate liquidity constraints for many firms, thus keeping a lid on insolvencies during the acute phase of the crisis. however, corporate bankruptcies are projected to increase in 2021. credit risk has risen for smes in particular, as they are more dependent on bank financing than large firms. a premature withdrawal of loan guarantee schemes may induce banks to tighten credit standards. 1 / 4 bis central bankers'speeches this would result in a credit crunch for non - financial corporations and translate into a sharp rise in company defaults. the pandemic has also weighed on the long - term profitability outlook for banks in the euro area, depressing their valuations. from around 6 % in february of this year, the euro area median banks ’ return on equity had declined to slightly above 2 % by june. the decline in profitability is being driven mainly by higher loan loss provisions and weaker income - generation capacity linked to the ongoing compression of interest margins. looking ahead, bank profitability is expected to remain weak and not to recover to pre - pandemic levels before 2022. this profitability outlook is reflected in rock - bottom bank valuations, with the stock prices of euro area banks recovering less than the overall market over the summer. non - performing loans ( npl ) are likely to present a further challenge to bank profitability. but there is typically a lag between a contraction in economic activity and the formation of new npls. the policy support provided to borrowers through moratoria and public guarantees may imply that this lag will be longer than in past downturns, and npls may start to materialise in the course of next year. banks have already anticipated some future credit losses by increasing their provisions. this is in response to a