the transmission of monetary policy to the real economy in a low interest rate environment and in changing economic circumstances. a second challenge relates to the potential side effects of our instruments. let me briefly illustrate these challenges without offering any definitive answers. state - and time - contingent monetary policy transmission a variety of factors influence the extent to which changes in financial conditions affect aggregate demand. it depends, amongst other things, on the slope of the is curve – the curve that balances investments and savings. this slope may be different when interest rates are low, or when they have been low for a protracted period of time. https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201104 _ 2 ~ 9afd2bf0ad. en. html 3 / 7 04 / 11 / 2020 monetary policy in changing conditions although the response of investment and consumption expenditure to changes in interest rates is at the heart of stabilisation policies, this question has received surprisingly little attention in the literature so far. academics and central bankers alike have focused on the slope of the philips curve rather than the slope of the is curve. a few studies suggest that monetary policy transmission may be non - linear in the level of the interest rate. [ 4 ] this could affect the extent to which we can bring future activity into the present : researchers have dubbed this the “ macroeconomic reversal rate ”. before the pandemic, for example, we observed stagnation in households ’ intentions to frontload major purchases ( see left chart slide 8 ). the household gross savings rate has increased rather than fallen. evidence is too scant to draw definitive conclusions at this stage. higher savings may also reflect the offsetting effects of structural factors. [ 6 ] an ageing society, for example, may see its savings rate increase despite low real interest rates. what is more certain, however, is that the pandemic has reinforced the trend towards higher savings ( see left chart slide 8 ). much of these savings have been forced, although a considerable part represents precautionary savings. these developments highlight that the strength of monetary policy transmission may depend not only on the interest rate level but also on the state of the economy. this is a particularly important aspect at the current juncture. significant and prevailing uncertainty about income prospects may weaken the willingness and ability of firms and households to take full advantage of loose financial conditions. recent surveys indicate that households continue

to deal with ( domestic and cross - border ) systemic risks in the banking sector. to be true, in the late 80s / early 90s the concept of systemic risk hardly existed. the flaws of the original treaty are therefore less of a conceptual nature – unless one applies the intellectual framework of today with the benefit of hindsight to judge the design of the early 90s. the main flaw in my view was that the political authorities and economic agents did not internalise enough what participation in a monetary union means. they received the benefits of reduced interest rates but missed out on the obligations for the country itself ( i. e. the need for adjustment through the domestic economy ) and towards other countries ( arising from negative spillovers linked to unbalanced domestic policies ). a coherent and viable architecture of emu ought to be based on more integrated frameworks for budgetary matters, economic policy, financial sector and democratic accountability. bis central bankers ’ speeches in light of the crisis and the urgent responses it required in the short term, one may lose sight of the major institutional progress achieved since the crisis erupted. besides putting in place crisis management tools and financial firewalls that not only proved effective but also underlined a degree of solidarity unseen before to accompany ambitious reform programs which began – where implemented – to yield results, european leaders have adopted major decisions aimed at significantly reinforcing the architecture of emu. first, the fiscal framework has been strengthened since the start of the crisis to improve fiscal discipline and restore fiscal sustainability in euro area member states. in particular, fiscal surveillance has been enlarged and fiscal governance has been enhanced by procedural steps to nearly automatic sanctions. we expect that no further holes will be punctured in this strengthened sgp. there are encouraging signs. national governments are addressing their fiscal imbalances. the euro area ’ s progress in fiscal consolidation is much more advanced than that of other regions of the world. its average fiscal deficit in 2013 is projected to be 3. 1 % of gdp, compared with a 5. 8 % deficit in the us or a 9. 5 % deficit in japan. gross general government debt is expected to peak at 96 % of gdp in the euro area this year vs. 106 % in the us and 244 % in japan. second, economic governance at european level has been improved by implementing the macroeconomic imbalance procedure ( mip ). the mip has been set up to enhance surveillance, identify potential risks and correct existing imbalances. this has been complement