vitor constancio : monetary policy challenges in the euro area speech by mr vitor constancio, vice - president of the european central bank, at the annual conference of the marshall society on “ the power of policy : solving problems and shaping the future ”, cambridge, 31 january 2015. this is the full text of a speech delivered in abridged form in cambridge on 31 january. * * * summary the monetary policy experience of the past seven years is reviewed. in pursuit of its objectives, the ecb has been very flexible in adjusting and expanding its toolkit. in a first phase, from 2008 to 2013, monetary policy measures aimed at easing financial constraints arising from malfunctioning money and funding markets. non - standard monetary policy was conducted in a context of well - anchored inflation expectations. it was not aimed at, but unavoidably resulted in, the expansion of the ecb ’ s balance sheet. the second phase, since 2013, is characterised by a more active use of the ecb ’ s balance sheet, as inflation started to fall significantly below 2 %, accompanied by declines in various measures of long - term inflation expectations. non - standard measures, introduced as from july 2013, included a policy of forward guidance, asset purchase programmes of private debt, a programme to provide targeted long - term funding to banks and an enlargement of the asset purchase programme to include sovereign bonds. a number of concerns have been voiced regarding the adoption of a large scale asset purchase programme ( app ) in the euro area. it is argued that these concerns are unfounded since : the transmission channels of the app go well beyond the direct effect on the price and yield of the purchased assets ; government fiscal discipline should not be achieved at the expense of central bank independence ; central banks have instruments to absorb the effects of an expanded monetary base should inflation become a risk in the future ; and finally, exuberance in specific asset markets should be addressed with macro - prudential policy tools, at national level, since price stability relevant for monetary policy refers to the market of goods and services, not to asset markets at large. at the moment, the euro area is suffering mostly from weak aggregate demand. supply - side policies are necessary to increase the medium - term growth potential. monetary policy, aiming at price stability by stimulating demand and supporting investment, should reduce employment and output gaps, thereby positively affecting medium - term growth. * * * ladies and gentlemen, let me start by thanking

make banks ’ shareholders and investors more prudent and will better protect european taxpayers from any misbehaviour by banks. that said, the best way to prevent crises in the future is to make sure that our economies are prudently managed and that we don ’ t let financial imbalances develop, as was unfortunately the case before the crisis. 4. the biggest challenge that cypriot banks have to face today is how to manage and resolve the extremely difficult and sensitive issue of loan servicing … the cypriot economy needs a functioning banking sector which contributes to the economic recovery. that can only be achieved if the non - performing loan issue is addressed forcefully. for that, the structure of incentives would have to be changed, so that both borrowers and lenders have a common interest in finding a pragmatic solution to the debt problem. the data tell us that this is not happening. conversely, non - performing loan levels are continuing to increase. the reform of the foreclosure process is part of the change that has to come about. in this respect, i welcome the supreme court decision on the unconstitutionality of the four parliamentary bills concerning the foreclosure law. this will help to contribute to the reduction of non - performing loans in the banking system and recreate margins of manoeuvre for banks to extend loans to profitable projects supporting the recovery. bis central bankers ’ speeches 5. the cypriot economic adjustment programme was well on track until recently. however, when political decisions touch upon legal reforms, such as foreclosures and privatisation, delays arise amid reactions … the work of the cypriot authorities and their commitment to the programme has been commendable. those measures were painful and they have imposed a large short - term cost on the economy and cypriot society. but they have started to pay off. they have helped to stabilise the economy and to improve the confidence of international investors. institutional and legal reforms are fundamental to enhancing the business environment and boosting economic growth and job creation. this raises difficult political discussions in cyprus, as in any country, but such discussions are nonetheless indispensable, as this is about changing the business model of the cypriot economy, and we are in a democratic society. 6. policy in the euro area is characterised by the lack of a common approach, given that the ecb is willing to proceed, if necessary, with further monetary policy easing and has called on those governments that have room for manoeuvre to loosen