paper series, no 1747, ecb, december. 5 / 6 bis central bankers'speeches 9 the fiscal stance is measured as the change in the cyclically adjusted primary balance net of government assistance to the financial sector. 10 see knotek, e. s. and zaman, s. ( 2014 ), “ on the relationships between wages, prices, and economic activity ”, economic commentary, august ; bidder, r. ( 2015 ), “ are wages useful in forecasting price inflation? ”, frbsf economic letter. 11 bobeica, e., ciccarelli, m. and vansteenkiste, i. ( 2019 ), “ the link between labor cost and price inflation in the euro area ”, working paper series, no 2235, ecb, february. 12 bobeica et al., op. cit. 13 see head, a., kumar, a., and lapham, b. ( 2010 ), “ market power, price adjustment, and inflation ”, international economic review, 51 ( 1 ) : 73 – 98 ; and taylor, j. ( 2000 ), “ low inflation, pass - through and the pricing power of firms ”, european economic review, 44 : 1389 – 1408. 14 bobeica et al., op. cit. 15 see hahn, e. and o ’ brien, d. ( 2018 ), “ monitoring the exchange rate pass through to inflation ”, box 3 in economic bulletin, issue 4, ecb. 16 see koester, g. and guillochon, j. ( 2018 ), “ recent developments in the wage drift in the euro area ”, economic bulletin, issue 8, ecb. 17 andersson, m., kok, c., mirza, h., more, c. and mosthaf, j. ( 2018 ), “ how can euro area banks reach sustainable profitability in the future? ”, special feature, financial stability review, ecb, november. 6 / 6 bis central bankers'speeches

in any event, the papers presented today and tomorrow bring further evidence that the relative importance of banks and markets is a widely used summary indicator of the evolution of financial systems. the changing nature of banking relationships in european finance today is the issue on which i would like to share a few thoughts with you this evening. banks deserve special attention as they are, in continental europe, the main suppliers of credit and financial services to individuals and firms. my argument will develop around two simple questions : • how important is relationship lending in the euro area? • given the current trends in bank structure and competition, is relationship lending on a declining trend, and if so, what could be the consequences? 1. relationship lending in europe by relationship lending, i mean that banks and their customers build up agreements on terms of credit, implying for instance secured access to credit lines at pre - set prices. the bank acquires expertise about the credit - worthiness of its customer by keeping close contact with the management of the firm. for instance, the bankers who sit on the board of many european firms can gain insider information on these firms. the implication of this close link may be that the bank provides the firm with easier access to liquidity. relationship lending is particularly widespread in the euro area, in particular regarding small and medium enterprises ( sme ). given that sme account for about 60 % of private sector employment in the euro area, it is immediately apparent that a reduction in the availability of relationship lending could have an effect on the euro area's economy and on the working of monetary policy. this is particularly relevant to determine the importance of the often mentioned " credit channel of monetary policy ". at the micro - economic level, relationship lending implies that as a tendency the bank insulates its customers from liquidity or interest rate shocks. in case of a drop to its cash flow e. g., a firm can draw on a credit line that has been previously negotiated. likewise, bank lending rates will not necessarily be adjusted in line with market interest rates. while firms that have access to these risk - sharing schemes can be expected to pay some form of an insurance premium to the bank, their decisions on investment, employment and production should be less sensitive to financial shocks. hence, at the macro - economic level, the more widespread relationship lending is, the smoother the business cycle should be. this may contribute to explain why business cycle fluctuations have traditionally been larger in the us and the uk, where relationship lending is limited