- stationary – whereas under price - level targeting, the rate of inflation will be stationary, and the price level will be trend stationary. hence, price - level targeting would limit uncertainty regarding the future price level and thus facilitate the forecasting of the real value of future payment flows which are fixed in nominal terms ( as is the case in the majority of financial contracts ). this would be beneficial because it would tend to reduce the risk premiums demanded by risk - averse creditors and thus lower the cost of capital. however, according to conventional wisdom, the potential benefits of the reduction in uncertainty regarding the future price level must be weighed against the potential cost of correcting shock - induced price - level shifts. bringing the price level back onto the target path may induce additional fluctuations in the inflation rate and real economic activity compared with targeting the inflation rate. whereas this reasoning may persuade us to be sceptical, the recent academic literature has stressed the potential benefits of price - level targeting which arise from the stabilising effect of the price - level target on inflation expectations. in this respect, price - level targeting has gained particular importance in the current period of extremely low policy rates since the stabilising effects of the price - level target on inflation expectations have the added advantage of reducing the probability of hitting the zero interest rate bound. this argument is based on the following reasoning : a negative aggregate demand shock leads to a drop in the price level to below the target path. if the central bank ’ s commitment to the price - level target is credible, the private sector anticipates that the price level will return to its target. hence, a drop in the price level will lead to an automatic rise in inflation expectations. this movement of inflation expectations mitigates the effect of the original shock on the inflation rate. consequently, for a given nominal interest rate, the real interest rate decreases. this stimulates aggregate demand and, in turn, keeps the required nominal interest reduction to a minimum. hence, a credible price - level targeting regime lowers the risk of hitting the zero bound and falling into a deflationary trap following a negative goods demand shock. given these stabilising attributes of price - level targeting, it is hardly surprising that price - level targeting regularly performs well in simulation studies which compare price - level targeting and inflation targeting under the assumption that the central bank is constrained to act under discretion. it may be argued, however, that when considering a fundamental change in the monetary policy regime, the

and tax policies are coordinated centrally at european level...... or a maastricht framework 2. 0 is established in which the principle of individual responsibility is reinforced. however, i do not see a majority in any euro - area country supporting the communitisation of fiscal and tax policies. at the current juncture, reinforcing the existing regulatory framework and strengthening the principle of individual responsibility therefore seems like a more realistic way of bringing liability and control in europe ’ s monetary system back into equilibrium. bis central bankers ’ speeches europe has already taken some steps in the right direction in this regard. for example, the refined fiscal rules require balanced budgets or even slight surpluses. in addition, procedures have been macroeconomic imbalances. introduced to identify and rectify however, these rules need to be enforced. and this is where we have a clear deficit. “ flexibility ” is the european commission ’ s new watchword when it comes to interpreting how the fiscal framework should be implemented. and the scope for flexible interpretation has actually widened over the past few years on the back of changes to the budgetary rules. however, sustained economic growth cannot be built on a foundation of resurgent expanding public debt. for as i already mentioned, lasting confidence and long - term growth are only possible through sound public finances. ladies and gentlemen, thus far i have touched on two key areas where there are lessons to be learned from the crisis : first, that individual countries need to implement reforms themselves and second, the need to strengthen and strictly adhere to a regulatory framework in which liability and control at the national level are balanced – as envisaged for the euro area from the start. 5. 3 european banking union moreover, as the crisis unfolded, the financial system was exposed as the achilles ’ heel, not just in europe but on an international scale. as a result, steps were taken at the g20 level to tighten banks ’ capital and liquidity requirements, thus giving rise to basel iii. compounding this, weaknesses were identified in europe ’ s banking supervision structures. national supervisors were often found to assess their own country ’ s banking system too favourably, with the effect that failing banks and stumbling states dragged one another down. only by destroying the harmful nexus between banks and governments will we be able to manage these contagion effects. and this is where the nascent european banking union comes into play. it represents a major step towards deepening european integration and consists of two elements :