16. 09. 2019 the emu at 20 : from divergence to resilience welcome address. third annual research conference of the banco de espana pablo hernandez de cos governor ladies and gentlemen, let me start by welcoming you to the banco de espana for the third annual research conference. we began organising this conference three years ago, with the aim of bringing together leading scholars and policymakers to discuss frontier research on relevant topics. this year, the chosen topic is “ the emu at 20 : current status and the way forward ”, which i think ranks highly in the current policy debate. it would be hard to imagine a more eminent group of researchers to discuss this topic. i would like to thank all of you for your attendance here today. 2019 marks the 20th anniversary of the creation of the euro. we reach this milestone in the context of a global macroeconomic deterioration, while still facing the legacy of the crisis, in terms of high unemployment rates and persistent levels of indebtedness. part of this worsening of economic conditions is linked to trade tensions, against a background in which the multilateral financial and trade system in place since the end of the second world war is being put into question. at the same time we are confronted with global trends, such as digitalisation and climate change, which pose significant challenges, of a different nature, for the european economy. but i am optimistic about our common future. economic and monetary union ( emu ) remains the world ’ s foremost economic integration project of recent times. and after 20 years, there can be no question that the euro is perceived by the public as a success. in the latest eurobarometer surveys, euro area citizens have declared the highest level of support for the euro yet recorded. europe has proved itself to be innovative and decisive, although sometimes the necessary steps have only been taken under the pressure of extreme circumstances, such as the ones we experienced during the last sovereign debt crisis. that said, some bold advances have been made towards the completion of emu over the past decade. let me highlight two of these. first, the two main pillars of the banking union that are now in place and operational : the single supervisory mechanism and the single resolution mechanism. second, the creation of the european stability mechanism, which played a significant role in the solution of the crisis, and the ongoing reform of which is expected to strengthen this institution ’ s capacity not only to combat but also to prevent crises. it is further envisaged that

first, it is important to clarify that predicting inflation over a two or three - year horizon is a very challenging task. especially in a setting as uncertain as the current one. therefore, like other central banks, we at the ecb use various indicators of future inflation, such as surveys of professional forecasters and financial market prices, which i will come back to later. key data in this regard are the ecb staff projections, which in turn draw on a wealth of economic and monetary analysis. as i have said, the latest projections published in september put average inflation in 2024 ( the end of our medium - term horizon ) at 2. 3 %, clearly above our target. these projections were based, among other considerations, on a future path of euro area interest rates – implicit in the financial market data available when the projections were prepared ( specifically, as at 22 august 2022 ) – that began with a hike of 50 bp at our september meeting, followed by subsequent further increases. 8 accepting that, in line with our mandate, interest rates will have to rise to a level that allows us to ensure a gradual convergence of inflation to our medium - term target, returning inflation specifically, the projections were based on short - term interest rates of 0. 2 % in 2022, 2. 0 % in 2023 and 2. 1 % in 2024. likewise, at that time the average nominal yield on euro area 10 - year sovereign bonds stood at 1. 6 % for 2022, rising gradually to 2. 2 % in 2024. it must be borne in mind that market interest rate expectations include not only expectations for ecb policy rate increases at any given time, but also a risk premium component. to 2 % by 2024 demanded that we accelerate the path of interest rate hikes as compared with that foreseen in the projections. hence the exceptional increase of 75 bp. the risks to the inflation projections further strengthened the case for such a large interest rate rise. one way to illustrate these risks is through the downside scenario envisaged in the latest ecb staff projections exercise, which shows how the economic outlook for the euro area could be affected if some of the risks to the baseline scenario materialise. under that downside scenario, in addition to a very significant downward revision of economic growth for 2023, inflation in 2024 stands at 2. 7 %, higher than the baseline projection ( 2. 3 % ) and further still from our 2 % target. one