– much more so than many other economies. this is particularly true for small and medium - sized enterprises, which form the backbone of the economy. in the eu, smes account for more than 50 % of value added and more than 60 % of employment. altogether, 99 % of all enterprises are small and mediumsized. 1 the three most important sources of financing for smes are bank loans, leasing and credit lines. 2 so they do rely heavily on banks. this makes them somewhat vulnerable. in crises, banks tend to charge higher premiums when lending to smes. and, as an ecb study shows, this premium is in turn partly driven by the amount of npls on a bank ’ s balance sheet. 3 the more npls a bank holds, the less it lends to the economy. so, it was clear from the start that npls were not just a problem for banks and their supervisors. other national and european authorities had to act as well. as for us supervisors, dealing with npls is a core task! we benefited from our european point of view, from being free of national traditions. we drew, for instance, on the experience of countries such as ireland which had already successfully dealt with npls. and we were able to compare and draw lessons from the different legal and judicial environments in 19 countries. building on all these insights, we developed a harmonised european supervisory approach for tackling npls. this was not easy, though, as we met with considerable pushback. but we nevertheless moved ahead. after first taking stock, we pursued a two - pronged approach from 2015 onwards : first, directly addressing legacy npls ; second, preventing new npls from piling up. on this basis, we devised a harmonised approach that rests on three pillars. the first pillar is qualitative guidance to banks on how to develop and implement strategies to reduce npls. these strategies should contain targets for reducing npls at the portfolio level over a three - year horizon. but our guidance simply outlines best practices in devising the 2 / 6 bis central bankers'speeches strategies and lists tools for implementing them. as no two banks are alike, each bank needs to pursue an individual strategy and meet individual reduction targets. it goes without saying that we diligently monitor their progress. the second pillar is a quantitative addendum to this guidance, in which we specify our supervisory expectations for the provisioning of new npls. these expectations depend on

. empirical estimates of potential output growth - by construction typically move somewhat over the economic cycle and this should not be confused with changes in the sustainable rate of growth. with the benefit of hindsight we were right to have been relatively cautious when the new economy paradigm was discussed at the time. instead we advocated the idea that whatever the benefits of ict, they would be best reaped over time by making clear progress in the removal of structural rigidities. given that demographics in the euro area are less dynamic than in other economies, including the us, we need even more improvements in terms of higher productivity growth, rising labour force participation and declining structural unemployment. the case for decisive structural reforms is pressing. this is not to say that there was no reform progress in europe in the past years, just that it is far from being achieved. unless member states step up their efforts they will not be able to achieve the lisbon targets, according to which the european union, by 2010, should become “ the most competitive and dynamic knowledge - based economy in the world ”. for the time being, however, it seems that the us economy has not only benefited more strongly from the growth opportunities offered by ict, but has also shown a better adjustment capacity during the past downturn. let me give you some examples of where i think further progress is needed in europe to enhance growth and economic resilience. most eu countries have undertaken initiatives for labour market reforms in recent years, but more progress is needed in attracting people into the labour market. the target employment rate of 70 % of the working age population set in the lisbon agenda is still far off : we were still at the level of 62 % in 2002. some countries have started to reform their social security systems. unemployment benefit systems have been streamlined, but in a number of cases, together with high marginal tax rates, they continue to provide a disincentive to take up work. larger contractual flexibility, such as for part - time jobs, helped to expand employment in certain segments of the labour market. but further reforms are needed that allow wages to reflect more strongly regional and sectorial productivity differences. in addition, the skill requirements posed by a knowledge - based economy imply that governments should intensify their efforts to improve education and training systems. eu countries made a lot of progress in product market reforms during the 1990s and this is an encouragement to do more. the share of eu internal market legislation not yet transposed into national laws is still too high. progress on