 Good morning. Thank you for the invitation. My presentation was prepared while I was still board member two weeks ago. So I'm a little bit in the grey zone, you know, so in between a little bit, in the decompression I would say, period. So my remarks are based on different work by the ECB staff, Philipp Hartmann and Frank Smetz and also work by the team of Massimo Rostanio, where you're Massimo there. So thank you very much for the abundant literature you gave me. And so I will try also to draw some of, you know, the essence of the remarks also that have been done by Mario. By the way, I broadly agree, Mario, with what you said before. So it's not really a coincidence, I think it's more than a coincidence. So let me go through the very simple outline. The first is section one and two, basically go through the past 20 years. The idea of course is not to rewrite history. So I ask a little bit for your understanding. Sometimes I will be a bit more critical, I think, going through the introductory statements of the ECB over the last 20 years. I will give you some of my reactions on that. But it is not the intention to criticize or to rewrite history with hindsight. It's always easy to do. So I'm not going to do that, but to try to draw some of the lessons of that. The second, the third section that you see here, I think fits very well with actually the concluding remarks of Mario, but also Olivier yesterday evening. It's macroeconomic stabilization beyond monetary policy. Basically is that the ECB cannot and should not be the only game in town in macro stabilization policy. I think that's a very important debate for the future as well, not only for the past. And basically the conclusion is what we know is that we urgently need to complete our institutional framework. Urgently, that's the term and that's what the message of Mario before. Now on the mandate, I think I have 17 slides. I will go relatively quickly on them. No, no, I will go. It's not too difficult. On the mandate, former colleagues, and on the mandate, I think what Mario was saying, I fully agree. It's important to say monetary union was a response to monetary disorders that were threatening the single market. And there were big differences in inflation history across the countries. I think if you look at the first 10 years at least, you don't understand what happened if you start from that and when you see on the left, you see the inflation HICP. You came from an average 4% to below 1% in 1999. But you also see the consensus projections of economists. You also come from a bit above 3% to something slightly below 2%, always through the period. You see that the dotted black lines show a little bit this shift. So we came from this period where there were, of course, inflationary problems in different countries. Price stability has been defined as headline inflation below 2% achieved in the medium term. Mario said that. This means that the central bank can look through supply shocks. I read the introductory statements from 1999 until now, but I was with hindsight sometimes surprised that the extent to which the introductory statements is worried about the second round effects due to higher oil prices. And that when you read the introductory statements, you find the concerns about second round effect up to 2012 even. Within 2011, but also up to 2012. I will comment a little bit later on this. But still you find this old pattern that we had seen before the monetary union where oil shock usually had profound second round effect for which we had in the ECB very much to react very strongly. But that mindset, and this is my point, the mindset went through well into the crisis in 2011. I will illustrate that a bit later. The clarification of the strategy in 2003 followed the end of the dot-com bubble when headline inflation fell to very low levels you see there on the chart. Concerns were expressed regarding the asymmetry of the definition of price stability so it's not new. Each rate between 0 and 2% could be qualified as price stability. So price stability could be 2, could be 0. And what is above 2% would not be compatible with price stability. That's why in that context there was a clarification and it seems that this clarification is not enough because Mario again today clarified again the fact that it's not asymmetrical so that was repeated again and again. But still I mean this is still very present in the minds of market participants in general. The clarification and there was also the issue of the zero lower bound at that time. Otmar you can testify on this. The clarification meant that the objective was an inflation below close to 2% in the medium term. And basically the idea was that if you would define your objective that way the probability of hitting the zero lower bound would be very small which was not of course what happened later but the probability was considered as very small. The other thing was that the relative price adjustment if you would follow that objective would be much easier of course and that would be sufficient for the relative price adjustment within the monetary union. So that's for my first point on the definition. The second point which I found personally very interesting this very simple graph you draw a 2% trend, price level and then you look at consumer prices, headline inflation and compared to the 2% trend and you see that we are more or less up to the sovereign debt crisis not to the global financial crisis but to the sovereign debt crisis you are more or less up to the trend. A little bit above even the trend. Then you have a plateau with the sovereign debt crisis the evolution of the price level and then especially with the very accommodative monetary policy that was followed after 2015 basically you see again a recoupling you know and the trend you get closer to the trend again of 2% but you are below as you know the trend, you are not yet there but you see that over a long period of time you were so that's a first observation. The other point that was in Mario's speech as well is that when you look at the core inflation the core inflation has been trending much weaker than the headline inflation and you see the big gap you know not that you have between core inflation supposed to represent more the underlying price pressures than the headline inflation. The reason of course for that has been that we had energy prices going up as a trend also and you can, here it's not the price level this is the rate of increase of prices and if you see the light curves there you can see the energy inflation and the light blue curve shows the core inflation and what is very remarkable in that sort of graph is that you don't see signs of second round effect if you look at that. So headline inflation can be kept more or less at 2% even a little bit above 2% for a while before the crisis but what you see is that when all prices increased you see sometimes core inflation going down and that was also illustrated in Mario's presentation when you look at the negative correlation actually between headline inflation and core inflation headline inflation goes up because of oil prices and core inflation is pushed down. From that you can of course conclude tentatively that policy has been very successful because basically agents seem to internalize the reaction function of the central bank which was Olivier at that time when you were the wheel and the dog that didn't bark at that time where you see the shift to a more inflation targeting regime brought credibility to the central bank and that was internalized by markets not necessarily the central bank had to act but the markets would internalize that reaction function. So that's one interpretation. I was looking a little bit further I think that's good evidence that this is correct. There is some evidence at some points for example when you see the core goes down when inflation goes up, headline inflation goes up there are other factors like the heart's reform in Germany that could have pushed also the core inflation down via services for example where wages take a very big part. So I think the evidence is probably yes that the reaction function which was quite tough in the definition as was said before but which was necessary given from where we came that the markets start to internalize that in their behavior but I think we should also look at other factors. When I say that is also when you see the light blue line you see of course the fluctuation of the core inflation but you also see a sort of declining trend in the core inflation over the years. So there are cyclical movements more or less in line with oil prices as usual but as a sort of trend down maybe due to China, maybe due to a number of factors are still very difficult to understand today so that's the one. The monetary and now I go into the second pillar Mario you didn't really speak about the second pillar or I didn't yet get it I think. So I think I compliment what Mario was saying. Monetary policy deliberations where and are still informed by two complementary analysis the monetary pillar and the economic pillar. The 2003 clarification gave a prominent role to the economic pillar but still recognizing that a specific focus on money and credit would give additional signals on longer term risk to price stability in the monetary tradition of course. So there were two pillars and this is still the case today where the two information sets are cross checked in the introductory statements for what the signal for price stability. In my conclusion I would say I really think this should be a little bit looked back again about this cross check Mario when we have in the introductory statement this cross check. We always repeat a little bit a cross check confirms you know the economic analysis. I thought it would maybe the time for Philip you're there it would be maybe the time to reflect a little bit about this because I had a little bit this problem. It doesn't mean there is not useful information don't misunderstand me on this. So here on this cross check for what signals for price stability so in the run up you can see it on the graph to the global financial crisis money and credit signal upside risk upside risk to price stability as did the economic analysis but and that's maybe for you Marcos when you intervene the money and credit view was not conceived as a financial stability pillar you came many years ago already with that point which I think is a very relevant point but what we learned basically from this is the absence of a proper macro potential framework was one of the important weaknesses of the pre-crisis institutional framework and I think that's at least to some extent I mean addressed now it has to be tested for the future but I think there has been a response to that. Over time over time and that's important also the money and credit view increasingly focused on the transmission of monetary policy via the banking sector. Extensive work by the staff I can testify has been done during the financial crisis to understand the path through of non-standard measures via the banking sector to the lending conditions I mean thanks also to the colleagues from the governing council the staff had access to very detailed balance sheets of banks and we can the staff can I mean for me it's the past but the staff can difficult to adjust the staff can trace the money so when you go for a teletros one of the measures you know bank for bank what they did and what is the pricing they apply to the different facilities you do so that's what was extremely important in our deliberation with efficient not efficient we could make for example cluster the banks between vulnerable the banks that came to the teletros the banks with strong capital base you know and the weaker banks and we could see a little bit how the monetary policy transmission was working so that work I think has been extremely important Massimo's team has worked a lot on this and I think this is one of the best I think achievements that we had in terms of understanding the transmission mechanism so the pass through so we could trace the money the next one is well it's getting worse now is a global financial crisis marked a dramatic change of course in the policy environment in the early phase of the crisis it was felt that tensions on the interbanking market and the short term funding markets could largely be addressed with liquidity management tools I think that's something to reflect and to pose a little bit on this the conduct of monetary policy focused on setting policy rates for achieving price stability on one hand and market operation focused on ensuring that market turbulence would not impair the transmission of the policy rates to the economy it was a separation principle where you give liquidity to the banks you facilitate a northerly deleveraging of the banks and they're not forced to sell and by doing that you hope that there will be no real effect on the economy basically that was basically the principle so the stance could continue and those operations acted as a complement to conventionally interest rate policy not as a substitute also during the sovereign debt crisis the sovereign bond purchase program, the SMP was to ensure death and liquidity in the sovereign bond market of distressed countries and restore an appropriate functioning of the monetary transmission mechanism this was not designed to alter the stance of monetary policy and to signal this well, credibly or not but to signal this, the SMP purchases were sterilized so you see that separation principle provided liquidity where the stance can be separated by the issue the tightening of monetary policy in July 2008 and in July 2011 in parallel with continued abundant liquidity provision have been controversial so I will give you a little comment on this I look at in particular to the introductory statements of 2011 and the introductory statement mentioned upside risk to price stability related to the sharp oil price increases and the risk of sovereign bond effect at that time, inflation was 2.7% which increased in July but I think it's important to see that it was in the tradition of when we formed the monetary union we had this experience of sovereign bond effect wages were also increasing at relatively high levels at that time so that was taken into consideration one point, the other point was there was also a reference to liquidity overhang which came from the second pillar information while money supply was found very sharply there was this concept that there was a sort of liquidity overhang that could feed into inflationary pressures and support sort of second round effect on inflation there was also in these introductory statements that the inflation risk related to increases in indirect taxes and administrative prices where material the other point which was the impact the rates that you can see here market rates that you can see because there on the yellow you see the spread government bonds, the weighted average of government bonds compared to the bond that aspect was not balanced to my view Jean-Claude we can discuss that because I don't want to rewrite history but it wants to show it was a little bit lacking the two-handed approach because the impact on financial conditions of that severe tightening on the bond market that you can see from the yellow line in spite of the S&P and Mario you see the vertical dotted line came just after the peak there so that was one of the aspect and the second was also I call it later the sort of catch-22 problem where countries were somehow forced to for austerity to have a tighter budget but on the other hand you also had macro consequences on the economy of this tightening of policy balance to my view was not sufficiently taken into account and so the result of that was basically a severe tightening of financial conditions in general in 11 that was quickly reversed in August 2011 but at that time I think we were a little bit the the other part and especially I thought the fiscal policy I thought about the presentation of Olivier also of yesterday evening the consequence of the financial tightening were not sufficiently taken into account in the picture I think at that time it was quickly reversed one will say but still a new phase of monetary easing as I said started in August 2011 with also additional liquidity provision measures the reactivation of the S&P to include Italian Spain LTRO this was not sufficient to stabilize financial markets a number of member states were caught in an adverse feedback loop risk to human price into government yields of a few countries reflected increasing probabilities that those countries would leave the year as you know now comes the whatever it takes the whatever it takes follows the European summit of June 2012 which decided on a number of institutional reforms to the financial budget economic policy framework of the monetary union and notably the establishment of the main elements of your in banking union making explicit reference to the need for breaking the sovereign bank nexus already before it was agreed to put in place the ESM by October 2012 in July 12 there was the speech of Mario in August 2 you remember Mario when you came back to the ECB and then we had the governing council we announced that it would introduce your empty program as you explain now the impact as you can see in the different graphs and also here was substantial I think it shows you it shows you that you cannot speak about stabilization policy in general or even stopping a panic with the whatever it takes without a strong backing you know from politicians deciding to send signals about what should be done in the unions I was imagining if Mario would have come with whatever it takes with anything about banking union nothing it would have been probably much more difficult it's very speculative but the timing of that communication was key because when you come with these sort of words you have to convince market you have to be credible so when people say you should have come early or you should the timing I think the timing was very well chosen and it was also because you know not many weeks after this summit there was a ground there that the institutional weaknesses would be addressed and there was the right timing with a strong signal that under these conditions you would do whatever it takes and then came the OMT with concrete measures that came after now unfortunately with all these episodes down said risk to price stability were increasingly apparent so here you have information derived from the inflation option prices and this in a context where interest rates were close to zero so this we know so three sets of measures were designed and progressively structured so there was a sequence you start with negative rates and other things I introduced but at some point we started to structured all these different measures in a comprehensive plan we said it's a complex plan a set of measures which are the way we structured is was in order to reach maximum effectiveness so we talked about a complex package of mutually reinforcing measures I can demonstrate that but I know not really time but all these measures were interacting and being amplified so each measure in isolation would have an impact but putting them together in a certain way would maximize the effect on the financial conditions in general so they are listed there it's basically negative rates and communication about future short-term rates basically forward guidance asset purchases program and forward guidance and the teletro from the I think in what Mario was saying the zero lower bound story when we went negative in June 2014 in June 2014 the governing council thought that it was very important to signal that the lower bound for interest rates was not zero Mario said it I think very nicely in his speech was not zero by keeping the expectation that rates could go further down and this was explicitly said in our guidance you would avoid sort of liquid trap situation if you think about the world being divided in the long-term investors pension funds and others the obliged buyers and the other composed of traders these people would buy bonds at very high prices if they think rates could go even lower so keeping that expectation present was very important to just keep that market alive and pushing the rates down so it was very effective when you look at the curve you know the option implied density is a three month or yes rates in 12 months time and you see before in January 2014 and you see the September 2014 how the curve has moved not only the average the expectation the first moment has moved to the left but the dispersion has been very much concentrated also to the left so that led to a substantial easing of financial conditions in general basically on the short to the medium but not only it's spread even beyond that to the long end of the bond market as you can see the difference between the US long-term rates and the European rates the your area rates after the forward guidance on rates so at the time of the taper tantrum we had a disconnect between the US rates and the European rate which also helped very much in keeping financial conditions very accommodative on the balance sheet the use of the balance sheet capacity and the composition I think we did it in the ECB in a very bold way this was a fundamental change from the way monetary policy was traditionally conducted from demand driven creation of central bank reserves to supply driven in my mind I'm not talking for my colleagues necessarily here but for in my mind what triggered that reflection of using the balance sheet capacity in my mind was when the bank started to reimburse the term equity facilities that we provided the teletro the VLTRO that we provided you can see on the graph the first peak on the balance sheet and then it goes down after 2013 it was typically a case of fallacy of composition because the banks start to reimburse which made sense from a micro point of view so they were reducing the dependence of central bank liquidity at that time but they were doing that basically by cutting on credit and so collectively of course it would have macro impact which was not good of course and so that sort of fallacy of composition and that's where we started to communicate in a careful way I admit in the ECB in the introductory statement about the balance sheet and the words you look at that is very interesting because you know it's slowly balance sheet balance sheet or ECB and at what point it was December 2014 where we said in the introductory statement that we the balance sheet given the the programs we had like the covered bond purchase program and the TELTROs at that time we have a sizable impact of our balance sheet which was intended intended to move towards intended to move towards the dimension it had reached at the beginning of 2012 you can see on the graph where we are today the blue is much higher at that time we communicated that we intended to bring the balance sheet and thus create excess liquidity which put an exerted pressure on the short term curve on the more short to medium term of the curve so that you see you see also the excess liquidity the dark line that you see fell very much when the banks reimbursed the liquidity and that led to some volatility on the short term money market of course and then we send this message and then we start to purchase government bonds this was uncharted territory that's the next point staff work I go back to the staff work was very important in assessing the impact of such program on financial conditions in general so we referred very much Jean Claude and that's also new compared to the previous period very often we mention financial conditions and the financial condition is sort of an aggregate of many market prices including credit premium by the way which we didn't do before in the previous period because credit premium at that time were more considered sort of market discipline signals so we separate very much in the communication the triple A bonds market in you know the risk-free curve while later we start with financial conditions in general which would incorporate many prices in markets including credit premium there so the staff was very the staff work was very important in understanding for example how much duration extraction would be needed for a given impact on the term premium what about the combined effect of QE and forward guidance and interest rate on portfolio rebalancing what impact of signaling good understanding this is an important point good understanding of market sentiment and good communication and disclosure to the markets what I called usually the two-way streets it's not a question of dominance it's a two-way street was essential and that's also very often a discussion are you dominate the we dominate the markets it goes two ways and our program was I think quite successful in a sense in a sense that it created the very easy financial conditions that were needed to bring back inflation to our aim and that you can see the this is a table that is extracted from the Hartman and Smet paper and that you see a table with the description of the instruments and here you see the effectiveness bias on the left the term structure of spot rates you can see the curve of course down and on the right you see the impact of credit easing measures basically the lending conditions from monetary financial institutions and the dispersions within your area and you see this this big reduction of what we call fragmentation although just for financial conditions I mean that's visible now the question is the transmission from financial conditions to wages and prices and from wages to prices to inflation that has been of course as also was said in Mario's presentation Mario's speech that was more difficult but when you look at wage Phillips curve on the left and on the horizontal you take a broad measure of labor market under utilization so that's a sort of U6 measurement like in the US you see and on the vertical you can see compensation per employee growth you see a relationship maybe flat but you see that there's a pass through from financial conditions to the labor market and to the wages what has been more puzzling is the transmission was said before from wages to inflation so we look very much in this with the staff about the what's happening in the service sector and we look at in the services the parts of services which are the most depending of wages most where prices you know content a lot of wages and even there you see that the transmission of wages to selling prices is not very strong for the time being so that's why also we come with patience and persistence in the policy because we see the first stages you know from financial conditions to wages but wages takes time and this is the discussion of course how long will you do that and what will be the side effects of these sort of policies and that's where we are still today now more recently there have been new headwinds related to the external environment and they have led to renewed expectations of monetary accommodation I will not repeat what Mario said just before about this now before concluding it is important to stress this is my almost last slide that macroeconomic stabilization policy cannot and should not be the sole responsibility of the central bank the ECB should not be the only game in town it's also in the Mario speech but I thought this graph quite useful to show is that fiscal policy of a number of countries have been caught in you know sort of catch 22 situation but the result was a significant pro cyclical tightening of the fiscal stance of the union as a whole which made the stance of the central bank very difficult so if you see the quadrant on the top left you can see the pro cyclical tightening 2010-11 and especially 2012-13 and then 14-15 and then the situation normalizes there but that has been as in the Mario speech has been a substantial tightening of fiscal policy at the time let's not forget also that in a lot of this period you had also a very sharp increase of spreads on financial markets in general for a number of countries so that was the situation at the time so I mean we draw the lesson of all this so that's one issue so fiscal policy the second I think is probably one of the for me or the most important is stabilization policy in the monetary union needs to be supported by a strong institution I think also Olivier came yesterday with more labor market sort of institution that was one of the points we have this I think the strong institutional setting for monetary policy but we don't have that for other policies I think that's obvious a lot of progress has to have been achieved during the bank sovereign debt crisis union and crisis management but this is still unfinished work there are very different visions and that's also Marcos you will come with that but I see very different visions across countries or what a proper institutional setting should be you will come with that and if you ask me I mean what is the most worrisome aspect is indeed that fundamental differences about what is the vision of yes we are ready to you know to address some of the institutional weakness divergence is how to do and what to do and in what time you should do that so in the concluding remarks I must confess I drafted them I think very carefully so I'm out of the ECB but I'm it's two weeks ago so I'm a bit careful so the first point is that monetary policy framework has served as well I think it's true the ECB could I say I'm in between so the monetary policy framework has served as well yeah I think it's true the ECB could act in difficult circumstances against both upside and downside risks and I must say from my experience 8 years in the 20 years I mean the governing council has been a very well functioning body and I always say it's quite normal that you have diversity and it should be of opinions within the governing council and that's one point you decide and that's what the council could do there have been three presidents and there is a lot of continuity in that institution I think that's important to say and to remember all over the 20 years of the period so that's the first remark the second remark clarifying the strategy further because I think Mario did it today also again and again further could support monetary policy making in an environment characterized by a persistently lower natural rate because that's very often the question we get if there is a new shock what do you do, what is your strategy and there are different opinions on this so at some point further clarification I think will be useful the third one is that the quantitative definition of principality was instrumental in establishing credibility in the first decade but its asymmetric formulation may lead to misperception in a low inflation environment and we heard also the president saying about the symmetry around the below but close to 2% which I think is again a message which is important to pass the third one is that with the passage of time the role of the monetary pillar has evolved as it should requiring a clarification of the role of the cross checking I really insist very much on this in policy deliberations this also raises the question of the role of financial stability consideration and the macro potential toolkit because now we have that additional toolbox which is not in the full hands of the central bank we have say in some of the parts of the macro potential tools but how would that articulate with the monetary policy making and I think that's something we should reflect more for the future and I know Marcos you came some years ago already with that but I think that's an important point the last one is an open door maybe but we have to say it European political leaders should urgently address remaining institutional weaknesses etc etc in this respect the role of fiscal policy in macro stabilization has to be enhanced I think that also I agree with the message which was given by the president that I think it's something that we have to the question as and I am finished with that the question is indeed what is a bit very worrisome is a different sort of visions about what is a proper institutional setting in your area and I think that it's about time that we have more clarity but that's for policy makers I mean it's not for the central bank really thank you