As a crucial counterpart, policy-makers are in the process of establishing the Single Resolution Mechanism, which should enable quick and efficient resolution of ailing banks without permanent recourse to taxpayer funds. Together, these new institutions will fundamentally strengthen transparency, stability and incentive-compatibility in the financial sector. In a primarily bank-based financial system like the euro area’s, these features are crucial, not only for the functioning of the financial system per se, but also for the conduct of monetary policy. This is because, with an impaired bank lending channel, monetary policy may lose its handle on the real economy and ultimately inflation. At the same time, given the persistent downside risks to price stability, monetary accommodation was a necessary ingredient in the crisis response. How has monetary policy contributed? Accordingly, since I last spoke at this venue, the ECB’s Governing Council has taken further decisive steps to engineer a monetary policy stance that is commensurate with the subdued medium-term inflation outlook. These steps included a sequence of further rate cuts, accompanied since July 2013 by explicit communication that we expect the key ECB interest rates to remain at current or lower levels for an extended period of time. But standard monetary policy in the form of rate cuts and the accompanying communication were not enough to ensure an appropriate monetary policy stance. In fact, given unwarranted fears of a euro area break-up, monetary policy transmission became severely impaired – to the extent that the financial market dislocations jeopardised our ability to deliver on our price stability mandate.
“And it builds on an established monetary policy doctrine that has gained prominence not least through its successful adherence by the Bundesbank for several decades”, Mr Draghi says. “Namely that the central bank should be endowed with a clear price stability mandate and, within this mandate, should be allowed – in fact obliged – to use its instruments in full independence to deliver price stability.” *** Ladies and Gentlemen, It is a great pleasure to speak to you tonight. When I last spoke at an event organised by the Bundesbank, in March 2012, the euro area stood at a crossroads. One direction pointed to continued malaise, with various vulnerabilities threatening to undo the benefits of economic, financial and even monetary integration. The other direction pointed to gradual repair, with ambitious reform efforts removing the key obstacles to economic stability and growth. The euro area has chosen the latter path. And today, we are seeing first signs that this decision is paying off. At the same time, challenges remain and continued reform efforts are needed to ensure that the recovery proves sustainable. Against this background, let me first elaborate on what I think are the key milestones achieved so far and then address what are the key challenges for the ECB in the coming months. What have we achieved so far? The euro area reform agenda has consisted of two pillars. One is to restore fiscal sustainability and economic competitiveness at country level.