the public and private sectors and the weakness of the institutions in the euro area to deal with that debt overhang. this implies two things. the first is that monetary policy needs to remain sufficiently accommodative to offset any headwinds and produce a sustained adjustment in the path of inflation. indeed, continued support for nominal growth is vital to accelerate the process of balance sheet repair so that banks can smoothly transmit our monetary policy and firms and households can capitalise on it. the second is that other policies need to work alongside monetary policy in removing those disinflationary forces – for example, by governments improving the framework for resolution of non - performing loans. but even if we can be confident that our policy can influence slack, can we be confident that slack can influence inflation? bis central bankers ’ speeches regarding the phillips curve, a precondition for central banks to exercise monetary control is that it remains negatively sloped – in the inflation / unemployment space. there has been a debate stretching over decades about the stability of the phillips curve and its power to explain inflation developments. that has only intensified during the crisis. while there is no agreed upon functional form of the phillips curve, my own assessment of the body of evidence is that, on the whole and using an array of different economic slack measures, the inflation - unemployment connection remains intact and in fact may have strengthened during the crisis. this appears to be especially true in countries such as spain and italy where lawmakers have actively reformed local labour market institutions and weak demand has led to a protracted period of wage moderation. another reason why i do not see signs of a disconnection between inflation and unemployment in the euro area is that – echoing a point also raised by robert gordon – the inflation process is occasionally subject to short - term spells of inertial drift, when supply side shocks hit repeatedly and cause serial downward inflation surprises. the sequence of negative commodity price surprises we have experienced may therefore have dampened the reflationary effect of the economic recovery, but only temporarily. the slope of the phillips curve, however, is of course only one relevant aspect. what also matters for the central bank ’ s ability to deliver price stability is the intercept, which is determined principally by inflation expectations. this brings me to the third dimension of uncertainty that is relevant for our decision - making – uncertainty over the way economic agents form expectations about future economic developments and economic policy actions. uncertainty over the way economic agents form expectations about future economic developments and

the approach taken up to now to tackle these problems has been to strengthen the current institutional system ( the lamfalussy system ). but much remains to be done. the ecb has recently published its proposals for improving the system, notably : i ) strengthening the role of the committee of european banking supervisors ( cebs, a level 3 committee that brings together the banking supervisory authorities ) in order to improve convergence and cooperation in supervisory activities. in particular, it is deemed necessary to reinforce the legal basis of the cebs ( that at present is a network of national authorities ) and both its accountability and that of its members, in relation to cooperation and convergence in supervisory practices. ii ) a greater convergence of the laws, by means of a clearer distinction between level 1 principles and the implementing measures by the commission at level 2 ( to which more attention should have been paid in the " capital requirements directive " ) and the elimination of those laws in the said directive that leave options and discretionary assessments to the national authorities. 8 in my opinion, the reasons for justifying differences in legislation, and differences in the applications of european laws, are getting weaker by the day. rapid progress is needed towards a single regulatory approach, applied in the same way throughout the single european market. this is what the market wants, what the banking and financial institutions see, for example, the speech by jean - claude trichet at the committee of european securities regulators ( cesr ) conference, “ europe ’ s single market in financial services : under construction or fully integrated? ”, paris, 6 december 2004 ; and at the eurofi conference, “ achieving the integration of european financial markets in a global context ”, brussels, 3 december 2007. l. bini smaghi ( 2006 ) : “ independence and accountability of supervision in the european financial market ”, speech at conference entitled “ financial regulation and supervision in europe ”, milan, universita bocconi, 9 march 2006 ; available at http : / / www. ecb. int / press / key / date / 2006 / html / sp060309. en. html. european central bank, “ contribution to the review of the lamfalussy framework ”, 30 november 2007. want and what their customers want. this is also necessary in order to remove the disincentives to closer cooperation between the national supervisory authorities. 3. two examples i would like to illustrate two examples of fields where it is necessary to progress quickly,