period of intensifying structural changes. old industrial patterns in europe are being changed when confronted with both the boost to productivity from it and globalisation and enlargement, all of which supports this process. these trends will eventually help productivity and growth in europe to start catching up with the us again. but in the short term the structural changes will lead to higher frictional unemployment as old industries are more rapidly replaced by new ones. in addition, the recent downturn never led to a dramatic increase in unemployment or a dramatic decrease in employment in the euro area ; hence, the upturn is probably also less likely to lead to rapid job creation. both of these factors create new incentives for fiscal policy to focus more on short - term job creation schemes and less on long - term fiscal soundness. and the new member states are not much different in this respect. they have experienced a decade of incredible structural change, and yet more is ahead. furthermore the new member states have great infrastructure needs and, coupled with high unemployment, there will be continued pressure for fiscal expansion, even in a cyclical upturn. so from this perspective, too, the hope that the recovery alone will “ fix ” the european deficit problem might be too optimistic. in addition, structural fiscal deficits in many of the euro area member states might be larger than present calculations show since there is a large risk that potential growth is lower than commonly assumed. estimates of potential growth for the old europe have successively been lowered as labour productivity growth has fallen gradually during the last two decades from around 2 % to about 1 % per year. however, the figures for the second quarter of this year were the highest we have seen for some time. the imf ’ s latest potential growth estimate for the euro area is about 1. 8 %. nevertheless, inflation has been remarkably stable, just above 2 % in recent years despite poor growth and presumed large negative output gaps. if potential growth is lower, the need for fiscal consolidation is even higher than present consolidation programmes show. let me summarize the problem. countries with larger fiscal deficits have had a more procyclical policy both in good times and in bad times. a commission paper finds a significant impact of elections on procyclicality, especially procyclical tax cuts. in addition, the structural deficits are most likely higher than presumed. with lower potential growth, the ecb will need to push the brakes earlier and more forcefully than most people assume. hence,

sabine lautenschlager : the european banking sector - the big challenges speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, at the iif european chief risk officer forum, frankfurt am main, 20 november 2017. * * * have you ever heard of meteora? meteora is a group of rock pillars in greece at the very top of which several monasteries were built centuries ago. as you can imagine, it is quite hard to reach these monasteries. in fact, until the 1920s or so, the only way to get there was by sitting in a basket which the monks then pulled up. now the story goes that, one day, a tourist got very nervous half - way up the cliff. he noticed that the rope attached to the basket he was in looked quite old and rather frayed. so he asked the monk who was accompanying him if they ever replaced the rope. “ of course we do, … ” the monk replied, “ … whenever it breaks. ” i don ’ t have to tell you that this is not how risks should be managed. it is our job, the job of risk managers and supervisors, to be a tad more forward - looking. we have to ensure that the rope is replaced before it breaks. and we have to ensure that proper safety measures are in place should the rope break unexpectedly. but in reality, it ’ s a bit more complex, of course. with regard to banks it ’ s not just a rope that might break. there are many different risks that have to be well managed to ensure the well - being of banks. some risks are quite likely to materialise, others less so. we all have a list of risks in our minds. and i am sure that these lists look quite similar. they might include interest rates that could be too low for too long, a sudden reversal of risk premia, geopolitical uncertainties, non - performing loans and cyber risks. banks must monitor and manage all these risks. however, we don ’ t need to discuss all of them today. so, in my speech i will focus on two of them : non - performing loans and brexit. in addition to that, i will discuss a third topic which is closely connected to risk : capital buffers, and how to calculate them using internal models. non - performing loans – the need to act in a sense,