And though the euro area unemployment rate is declining – down almost 1.5 percentage points from its 2013 peak – a great deal of slack still remains in the labour market. Indeed, if unemployment continues to decline at its current pace, it may take years before the euro area returns to its pre-crisis unemployment rates. And as we have seen in the UK and the US, even at that point – when the so-called “NAIRU” is reached – there may still be a substantial time lag before a tight labour market translates into higher wages. This suggests that, for services inflation to rise over the medium-term, we will need to see a faster closing of the output gap in the euro area and a quicker return towards full employment. 2  “Understanding Inflation Dynamics and Monetary”, Policy Panel remarks by Vítor Constâncio, Vice-President of the ECB, at the Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City, 29 August 2015. BIS central bankers’ speeches  3  The ECB’s monetary policy response So putting the picture together, we have seen two factors that could endanger medium-term price stability in the euro area and warrant a monetary policy response: a global environment of volatile oil and commodity prices that could feed into expectations; and a domestic environment where persistent slack continues to constrain price pressures. But as we have shown, even with interest rates at zero, we have an array of conventional and unconventional measures to deliver that response.
At the European summit of 26/27 October 2011 governments announced further steps to enhance fiscal governance, notably a strengthened surveillance of countries under the excessive deficit procedure and the implementation of balanced budget rules in all euro area Member States. Important steps have also been taken to strengthen the European Financial Stability Facility (EFSF). The EFSF has been ratified by all 17 Member States of the euro area and agreement has also been reached on leveraging existing EFSF resources in order to increase the overall “firepower” of the fund without extending the guarantees underpinning it. Conclusion Looking ahead, the identification of the necessary reforms has to start from being clear about what the ultimate objective is: the need to establish institutional arrangements which provide credible incentives for sound fiscal and macroeconomic policies in a monetary union. In my view, a more fundamental deepening of fiscal and economic policy surveillance is necessary in the long run. This would involve a transfer of sovereignty to the European level of decision  11  See, for example, R. Morris, H. Ongena and L. Schuknecht (2006), “The reform and implementation of the Stability and Growth Pact”, ECB Occasional Paper, no. 47, June (http://www.ecb.europa.eu/pub/pdf/ scpops/ecbocp47.pdf), or M. Catenaro and R. Morris (2008), “Fiscal policy and implementation in EMU: From Maastricht to the SGP reform and beyond”, F. Farina and R. Tamborini (eds. ), Economic Policy in the European Monetary Union: From the Old to the New Stability and Growth Pact and Beyond, Routledge.