Cautious optimism does not entail a naïve expectation that the “land of milk and honey” is just around the corner. Historical experience teaches us that the cocktail of an economic  BIS central bankers’ speeches  5  downturn and a financial crisis is usually associated with a prolonged recession and losses of jobs and welfare. Most structural reforms take time to generate positive effects, and some of the countries in distress are still saddled with rigidities in the markets for goods, services and labour. High nominal rigidities, for example, induce a pattern of adjustment to shocks that falls disproportionately on employment and production volumes. Countries must progress with a deep-seated structural reform agenda to address the existing rigidities, reduce costs to firms, and to increase competitiveness. To prevent – and indeed reverse – job losses, the downward adjustment of both prices and wages need to be stronger in those areas where unemployment is still high, and where this adjustment has not taken place due to structural or institutional factors. If this goes hand in hand with a continued consolidation of public sector budgets, then the cautious optimists will be vindicated through a chain of reduced uncertainty, renewed investor and consumer confidence, better access to funding and a return to robust and sustainable growth. Reforms at the European level  Domestic reforms are important, but we also have work to do at the level of the euro area and the European Union.
Second, the perception that the central bank will always “pick up the pieces” might give incentives to excessive risk-taking and high leverage. Even in good times that perception could discourage sound fiscal policies and prudent financial behaviour. In the design of non-standard measures and in its communication, the ECB has taken great care not to give such adverse incentives to either banks or governments. The following elements, among others, serve as proof:   The non-standard measures are temporary in nature. Some of them will expire automatically, if not renewed. On top of that, we have all the necessary instruments to reverse the current situation of abundant liquidity provision.   The mandate of the ECB as stipulated by the Treaty has an unambiguous focus on price stability. In combination with the ECB’s monetary policy strategy it provides a clear guidepost and has proved effective in anchoring inflation expectations over time.   The monetary policy strategy gives a prominent role to the monetary analysis which captures money and credit developments and ensures a symmetric reaction to financial forces.   The design of the tool called Outright Monetary Transactions creates the right incentives for governments to improve their performance with respect to fiscal prudence and structural reforms. I will expand a bit further on this fourth point. OMTs will only be activated in cases where the benefiting country has signed up to strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme.