##ness, that is goods and labour markets, social security systems and pension schemes. of course, the effects of these changes will mainly be felt over the medium to longterm. we still have a lot of work to do, however, particularly in liberalising goods and services markets, making labour markets more flexible, and increasing profit margins to enable companies to start investing in innovative technology again. this is without doubt the most important lever for guaranteeing a strong and sustainable recovery in the euro area, and one that will create jobs. 2. the outlook for inflation in the euro area of course, no summary of the euro area situation would be complete without talking about the current low level of inflation, which poses a major challenge for the eurosystem, and for the euro area economy as a whole. the sources of and reasons for such a low level of inflation are complex and multiple. temporary and global factors may be at play in the euro area, with import prices falling. i also think there are more permanent and deeper forces pushing inflation down both at the euro area and global level. let me make a few points regarding this challenge to european monetary policy today. first, and you all know this perfectly well, low inflation is not deflation. deflation is a permanent and cumulative process of decline in the overall price index, fuelled by negative expectations. having this in mind, there is no deflation today in the euro area. prices are still increasing and, most importantly, so are nominal wages. and, something even more crucial : inflation expectations remain firmly anchored in positive territory, even in the short run. bis central bankers ’ speeches second, low inflation provides economic stimulus by boosting real income. in most parts of the euro area, nominal wages are downward rigid. every time inflation “ surprises ” on the downside, it creates an unexpected increase in real wages and purchasing power. i believe this mechanism is playing some role by improving economic sentiment and supporting consumption as we have seen in the euro area over the past months. that said, when inflation is too low, it carries very significant dangers and risks : • first, it makes real adjustment more complicated. • second, low inflation makes it difficult to attain low, or negative, real interest rates, which are necessary in all advanced economies at the current juncture. • finally, low inflation increases the risk that the economy could fall into outright deflation if and when it is hit by a negative shock. the 2 % target is meant to

svb's short - term liquidity ratio ( lcr ), had it been applicable, would have been below the 100 % requirement, which would have been an early warning signal – for memory ’ s sake, all liquid assets are booked at fair market value in this ratio. the priority is therefore not to keep reworking the basel requirements - and thus delaying their implementation - but to implement them everywhere and quickly, as the fed vice chair ’ s – michael barr – report suggested it in april. in short, more basel iii now, rather than a hypothetical and delayed basel iv. however, there are two issues to consider : the increased speed of deposit withdrawals connected with digitalisation and social networks - raises new challenges. none of the ideas put forward on this subject are clear - cut, but none should be taboo. moreover, the lack of liquidity and transparency in the single - issuer cds market must no longer give rise to systemic risks : as a first step, we must ensure a better understanding of the transactions, the participants and the correlation risk with other financial instruments. let me now turn to supervision. why did credit suisse fail despite meeting the requirements of basel iii? the answer is clear : good regulation is necessary ; but it is never enough. a highway code - regulations -, even the best one in the world, will only be effective if the traffic police - supervisors - are efficient. risks generated by specific business models should lead to stricter requirements. this is precisely the spirit of " pillar 2 " of the basel framework. supervision can and must be responsive, intrusive - including with on - site inspections -, exercised by highly qualified professionals, and applied forcefully. this is not wishful thinking : this active supervision is one of the greatest success stories of our european banking union. the ssm demonstrates the benefits of bringing all players under one main authority only, rather than regional ones, with clearly defined responsibilities and coordination. furthermore, our active supervision demonstrates the strong value of regular stress tests, which are this year typically based on a sharp rise in short and long - term interest rates : this is the way we in europe already deal actively with irrbb, including for smaller institutions. page 3 of 6 resolution is the third ‘ blessing ’, also less operational. the fact that the swiss authorities opted for a merger in the case of credit suisse raised new questions about how to make resolution more reliable. let me share just some thoughts at this point. the