relative to the trajectory expected in december last year, the projection for headline inflation for 2019 has remained largely unaltered. by ensuring accommodative financing conditions, monetary policy will continue to support domestic demand by mobilising idle resources. this will lead to a build - up of domestic price pressures and ultimately pull underlying inflation up as remaining slack in the economy is gradually reabsorbed and the output gap narrows further. in turn, this will facilitate a durable return of inflation back to a level that is below, but close to, 2 % over the medium term. today, an important element keeping underlying price pressures subdued is muted wage dynamics, which are shaped by many factors. at this stage, besides weak productivity developments, there is still a significant degree of labour market slack that keeps a lid on wage growth. furthermore, the process of setting wages is to some extent backward - looking in a number of euro area countries, reflecting formal and informal indexation mechanisms. 2 additionally, the timing of wage negotiations plays a role in postponing the point in time when growing confidence that inflation is approaching the ecb ’ s intended medium - term level starts to become more visible in aggregate wage figures. moreover, weak wage growth could also reflect previous downward wage rigidities : difficulties in reducing wages during earlier stages of the crisis may result, symmetrically, in a slower upward adjustment of wages as labour market conditions improve. 3 overall, while we are certainly seeing a firming, broadening and more resilient economic recovery, we still need to create a sufficiently broad and solid information basis to build confidence that the projected path of inflation is robust, durable and self - sustained. underlying inflation pressures still give scant indications of a convincing upward trend as domestic cost pressures, notably wage growth, remain subdued. importantly, the economic recovery and the outlook for price stability are still predicated on the very favourable financing conditions that to a large extent depend on continued monetary policy support. absent that quantum of support, the progress towards a sustained adjustment that we see in our projections is likely to be slower or even stall. therefore, we need to look through the recent surge in inflation, which is driven by transient factors that will probably fade before long. our conclusion that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term remains valid. of course, monetary policy cannot be the only source of support for growth : action from other 2 / 3 bis

situation, the underlying reality was that government finances were often buoyed artificially by cyclically sensitive revenues. with the deterioration of the economic situation the structural weaknesses in the underlying fiscal position became evident culminating in the current sovereign debt crisis in some euro area countries. these developments highlight important shortcomings not only at the level of national policymaking but also with respect to the institutional framework at the european level. the stability and growth pact ( sgp ) was watered down in 2005 and has been ineffective in preventing the build - up of significant fiscal imbalances. peer pressure has not worked and the changes in the fiscal rules in 2005 have led to excessive political interference and the lack of effective implementation. moreover, the institutional framework so far lacks any effective tools for macroeconomic surveillance which could prevent the emergence of bis central bankers ’ speeches macroeconomic imbalances. the broad economic policy guidelines have proven not to be an effective tool. before turning to the necessary policy responses i would like to stress that the fiscal and macroeconomic policy challenges are not problems which some euro area countries face in isolation but are also evident in many other advanced economies outside the euro area. government deficit and debt levels have reached historically high levels. concerns about the soundness of fiscal policies are a broader phenomenon, as, for example, discussed in imf research and highlighted by the recent lowering of the outlook for the u. s. sovereign debt rating. also issues of competitiveness and external imbalances are global in nature and not specific to the euro area. but this is not an excuse for the europeans not to bring their house in order. what has to be done? a number of policy implications for the euro area follow from this analysis. the main objective has to be a smooth functioning of emu which implies that countries follow a path of sustainable and balanced growth. the strategy to achieve this consists of two key elements : first, to unwind the imbalances that had arisen during the first decade of emu ; and second, to ensure an adequate institutional framework and sufficient structural flexibility of individual member states so that the risk of such imbalances occurring again is minimised. the first challenge is to restore price and cost competitiveness. in a monetary union such as the euro area, with a single currency and a single monetary policy, the main adjustment mechanism is the competitiveness channel which works via an adjustment in relative prices and costs. over the next few years, the restoration of competitiveness will require significant further adjustments