their costs to final consumer prices, setting in motion a perilous wage - price spiral. weaker slowdown in aggregate demand this brings me to the third type of upside risks : aggregate demand may be slowing by less than currently anticipated, implying that fiscal and monetary policy are not sufficiently restrictive. fiscal policy is expected to tighten over the projection horizon. however, only about half of the discretionary stimulus provided in response to the pandemic and the energy shock is expected to be reversed by 2025. such discretionary measures are leaving fiscal policy accommodative and are not sufficiently offset by efforts to increase public investments that could help reduce medium - term inflationary pressures. in this case, monetary policy must become more restrictive. quantifying the level of interest rates necessary to bring inflation back to target in a timely manner is inherently difficult, however, as there is large uncertainty about the effects of monetary policy. first, within each model there is a large range of plausible outcomes ( known as parameter uncertainty ). for example, according to a benchmark model from the academic literature, a one percentage point increase in the short - term interest rate could dampen inflation after one year by as little as 0. 1 percentage point, or by as much as 0. 8 percentage points ( slide 9, left - hand side ). the second source of uncertainty relates to model uncertainty – that is, even the median estimate, which itself is surrounded by large parameter uncertainty, usually differs considerably across different classes of economic models. [ 22 ] for example, the estimated impact on inflation in 2025 of the ecb ’ s policy actions taken since december 2021 ranges from 0. 9 to 3. 9 percentage points across three of the ecb ’ s main macroeconomic models ( slide 9, right - hand side ). expectations are critical for monetary policy transmission these differences reflect, to a considerable degree, the role that expectations are assumed to play in consumption and investment decisions. put simply, the more households and firms believe that the past is a good guide for the future, the less powerful monetary policy will be. inflation expectations are a case in point. if they are adaptive, meaning they change in response to actual inflation outcomes, inflation will become more persistent, and monetary policy will transmit more slowly. carefully analysing how inflation expectations evolve is therefore critical for understanding the strength and speed of policy transmission. at present, the long period of above - target inflation raises concerns about a potential shift in inflation expectations. the

there are cases where lasting real growth differentials do not reflect welcome catching - up processes, but rather structural deficiencies in some countries, leading to low trend output growth and persistently high unemployment rates. such divergences between different countries are independent of whether or not these countries share the same currency, and in any case cannot be addressed by monetary policy. countries that show a relatively poor performance in terms of longer - term trends of real growth and job creation are often also those whose domestic economy has been less flexible. for these countries structural reforms are highly advisable. measures aimed at strengthening product market competition, labour market flexibility and thus job creation would certainly be welcome. they would enhance the incentives for firms to both invest in real and human capital and offer new jobs. close monitoring of unit labour cost and wage moderation are also, in such cases, essential to reduce excessively high unemployment. the more successful the structural measures are, the more jobs will be created at current wage levels and the less wage moderation will thus be needed in the long run. however, for those sectors and areas of qualification in which unemployment is high and / or the competitiveness of domestic workers is threatened, wage moderation, will be important to support job creation, and thus consumption demand. let me stress that both types of measure - reforms and wage moderation - support employment even in a rather closed economy. of course, both measures would tend also to enhance external competitiveness, but their positive effects do not depend on this latter channel. sometimes a radically different equilibrating mechanism is suggested. it has been argued that a euro area country that experiences relatively weak aggregate demand should increase wages more strongly in order to ensure higher demand for domestic goods. this would, however, be counterproductive. higher real wage and unit labour costs in areas where unemployment is too high would undermine job creation and thus reduce demand and supply even further. of course, once full employment has been reached, real wages can and should grow in line with productivity increases. all countries and economies benefit substantially from emu as i am speaking here in mannheim, let me emphasise that the economies that had a very credible currency before the euro such as germany are benefiting substantially from their integration into the euro area. the euro is as credible and stable as the deutsche mark before it. the purchasing power of german workers and consumers has been enhanced by relatively cheap imports from countries within europe and beyond. employment has been supported by strong export growth, not