 Thank you for inviting me and I'm especially delighted to be here at the time when the country has newly exited its adjustment program and restored its economic autonomy. While of course the challenges are still not over, the Irish people have nevertheless set an example to the rest of the Euro area about how to face a period of economic difficulty that is to face it head on and to take the necessary measures and in doing so to bounce back as quickly as possible. The good news is that the recovery also appears to be taking hold in the rest of the Euro area. The latest data suggests that economic growth has continued to pick up with activity being supported not only by net exports but to some extent also by internal consumption. Nevertheless as we have stated the recovery remains weak and unevenly distributed and there is a long way to go to bring down the very high levels of unemployment. This raises the question of how we can revive sustainable growth across the whole of the Euro area. In my view there are limits to how much we can expect from demand stimulus. Monetary policy will remain accommodative for as long as necessary but monetary policy alone cannot solve problems it merely buys time. Fiscal policy is also necessarily constrained by high depth levels and while the private sector undergoes a period of deleveraging we cannot and we should also not expect to see a return to the debt fueled aggregate demand growth of the past. This means that to revive growth we have to look mainly to the supply side capacity of the economy that is its potential growth and here the situation is not encouraging according to the European Commission potential growth in the Euro area has fallen from the period 2000 to 2007 from a level of 2.2 percent to a level of 0.9 percent in the period 2008 up to 2013. We need to do everything in our power to reverse this situation and what I would like to discuss today in my remarks is how we can achieve this. Let me start briefly reviewing why potential growth has contracted during the crisis and the challenges this creates for policy makers. In doing so I will use what I would call a broad definition of potential growth namely the economic activity that can be sustained by means of the available production factors such as capital labour total productivity growth without engendering inflationary pressures and or fueling asset price boom busts so it's a little bit broader than the tradition. Starting with capital now investment has been one of the main casualties of the crisis with total investment shrinking by more than 15 percent in the Euro area since its peak in 2008. This to some extent is of course cyclical as well as reflecting a necessary correction of previous over investment especially in many countries in the construction sector and in the real estate. Yet we have also seen a strong and so far persistent construction in business investment which may weigh on future productivity growth as such investments tend to raise the technology content of capital. A prolonged period of below trend investment could also lead to an excess of savings over investment and therefore a fall in the natural interest rate. Then from capital to labour, labour supply has also been weak. One positive factor has been the increase in the labour participation rate in the Euro area by around one percentage point during the crisis and it's interesting to note that in the US during the same period you have had a drop in the participation rate and I have seen recently a study which says that if we take into account this behavior of the labour market on both sides of the Atlantic the unemployment rate would be more or less equal in Europe and in the United States. But however this increase in the participation rate in the Euro area has also been said against an increase in the Euro area long term unemployment from 3% to 6% which creates a risk of workers' skill being eroded and skill mismatches emerging. This is particularly relevant because unemployment is concentrated among those with lower skills. Around 20% of low skilled workers are unemployed compared with only 7% of high skilled workers. The third input, total factor productivity which principally captures long term technological progress has only fallen marginally during the crisis, most likely reflecting the underutilized capacity in the inputs to production. However, this is no cause for comfort as total factor productivity was on a declining trend in the Euro area well before the crisis and has recovered less quickly than it did in the United States. These developments create two interrelated challenges for policy makers. The first is how to prevent the fall in observed growth from feeding back into potential growth. Here the key issue is to avoid that rising long term unemployment and structurally low investment create hysteresis effects. The second challenge is how to raise potential growth in a durable way. In line with my broad definition of potential growth recent research has suggested that pre-crisis estimates may have been overstated by effects which are linked to the financial cycle. I refer here to work by Claudio Borio from the BIS now. In other words, after incorporating information on the unsustainable developments in real interest rates, credit growth and property prices that characterized the period 2003 to 2008, potential output may have been lower than what we thought. Return to the status quo ante may not therefore be enough to restore high levels of sustainable employment. These challenges are interrelated because to the extent that we can achieve an upward shift in the future growth potential it will affect growth expectations today. This might induce firms and households to front load consumption and investment decision thus helping lower the risk of hysteresis effects. And vice versa, if there is no prospect of higher growth in the future we could fall victim to self-fulfilling negative expectations. For this reason I see policy action on both fronts as urgent and there are three policy areas where I see could be relevant in this respect. I start with monetary policy, financial sector repair comes second and finally most importantly of course structural reform. We know that monetary policy can help by time for necessary structural measures to be implemented but going beyond that it may seem strange to include monetary policy in a discussion of potential growth. The pre-crisis consensus was clearly that monetary policy could not affect the supply side of the economy while it could help stabilize output around trend it could not affect the trend itself. However there has been some discussions among central bankers as to whether monetary policy can have more lasting effects as well. For example if an extended period of low demand is creating hysteresis effects a more accommodative monetary policy that boosts the economy may prevent a permanent downward shift in productivity. That is it can at least for a time prevent a cyclical fall in growth from becoming structural too quickly. Well the jury is still out on this discussion it is clear that the supply capacity of the economy is determined by structural features and monetary policy obviously cannot substitute for structural features. Nevertheless some see that monetary policy can play what I would call a defensive role in a period of economic weaknesses. In our case by delivering our price stability mandate while we cannot raise growth potential we can perhaps limit or at least delay the degree to which it falls. The effectiveness of monetary policy in the euro area has unfortunately been hindered during the crisis by financial fragmentation that means that in countries where low interest rates were most needed they were not achieved but we are now beginning to see signs that monetary policy is once more gaining traction across the euro area in particularly to some extent via a still impaired bank lending channel and that on the funding side and on the lending side. Bank funding conditions have eased considerably since mid-2012 in the bank counterparty risk has fallen as evidence in the sharp decline in the spread between secured and unsecured money market lending not all over Europe but broadly speaking. Benchmark interest rates notably sovereign yields have been responding much more homogeneously to our rate reductions and on the lending side the transmission of our interest rate decisions to the bank lending rates is I must admit still very uneven across the euro area countries but the dispersion has as of late narrowed considerably our latest bank lending survey also confirmed a stabilization in lending conditions with improvements highly concentrated in stressed countries in short we have reason to be I would not like to use the word optimistic but let's say be less pessimistic then that our accommodative monetary policy is slowly feeding through to the real economy and as such can help prevent damage to the potential growth caused by a prolonged period of economic weakness yet it is also clear that low interest rates cannot raise growth on a structural basis what is crucial to actually lift productivity is credit being allocated to where it is most productive and that brings me to the financial sector repair there is considerable empirical evidence that a strong driver of aggregate productivity growth is churn between firms less productive firms exiting the market and new innovative firms entering or existing firms reallocating to more productive sectors the job of the financial sector is to ensure that credit allocation supports this process however what seems to have had happened in parts of the euro area is that banks with weak balance sheets have retarded this process of proper market functioning one recent study found that larger banks have reallocated credit away from riskier firms preventing new entrance while smaller banks have engaged in so-called evergreening of loans thereby inhibiting firm exits weak banks also appear to have slowed down sectoral reallocation to give just one example despite the recent improvements in cost and price competitiveness that we have seen also in Greece for example take another example the sectoral allocation of credits has not substantially shifted to where you would expect it to shift with this improvement namely the external sector and export oriented firms this suggests that banks in certain euro area countries are not facilitating sufficiently the shift towards more productive sectors financial sector repair therefore has to be at the core of any policy to raise euro area growth potential and to ensure that lending is directed towards productive activity in my view there are two policy priorities first strengthen banks balance sheets that is for losses to be properly acknowledged and for adequate recapitalization this is why our ongoing comprehensive assessment of banks is so important it will not only restore confidence in the sector and in the quality of their assets but it will also create the conditions for potential growth to recover more quickly along the line I have just the linearity the assessment the comprehensive assessment has a further benefit as well it ensures that the ECB's low interest rates do not encourage banks and firms to delay restructuring in this way it allows us to maintain the monetary policy stance very low interest rates that is appropriate for the euro area while mitigating any possible negative effects linked to misallocation of resources the second priority in bank repair is to encourage alternative funding sources in the euro area and to more develop capital market funding in the euro area so that long-run productivity growth is not so dependent on the sharehouse of the banking system to some extent we see this happening already and in an organic way in so far that corporates in large countries are already substituting bank lending for security and equity issuance and you remember that president Draghi in his press conference yesterday he mentioned that the negative credit allocation in Europe would practically shift to zero if it were to be corrected by the increase in capital lending by non-financial corporations so there has been a certain substitution but this option is of course largely not available for small and medium-sized enterprises making them very sensitive to the banking sector repair and their stress as well this is why I have been several times vocal in the past in supporting the revitalization of the securitization market in Europe where Ireland also had played an important role and is could also play again an important role in the future because this market virtually has dried up in recent years I see this as an important tool to help banks manage the credit risk associated with lending to SMEs however for it to recover it is critical also that the regulatory treatment for example of asset back securities is based on real data and not on the data legacy of the US subprime disaster we have a very different experience with ABS here in Europe between mid-2007 and the first quarter of 2013 the default rate on ABS in the European Union was only around 1.4 percent whereas it was 17.4 percent in the United States and that is a basis for the proposals for regulation while financial sector repair can help ensure that credit flows to the most productive firms we also have to ask the question where will those firms come from the incentive for firms to exploit economies of scale invest be innovative that is to be productive depends critically on the business environment we therefore need to ensure that we have the economic framework conditions that encourage this and this brings me to the key topic of my speech today and that is structural reform put simply there is no way we can achieve higher potential growth in the euro area without them structure reforms are essential to raise the trend components of the inputs into production investment and labor and the efficiency which which these inputs are used which is nothing else than total factor productivity first while investment in the euro area may pick up as the uncertainty caused by the crisis receipts to raise trend investment there needs to be fresh opportunities for firms to develop new business models and grow for euro area economies the main area where that can be achieved is through addressing regulatory barriers for example planning laws that limit retail expansion or transport regulations that in the cross-border projects as we have seen that the need for cross-border infrastructure in Europe is still a huge amount a recent report by a consultancy found that 45% of fixed investment in Europe was concentrated in sectors where governments have significant regulatory influence implying that structural reforms in these areas could provide a significant boost to investment and as many investment projects benefit from returns over decades they could be made viable with regulatory changes even in a relatively weak economy second given weak demographic trends in Europe raising trend labor supply is only really possible through further reform measures we know that these can work the increase in labor participation that I mentioned before during the crisis in Europe has largely been driven by previous reforms in order to increase female participation rates on the one side but on the other side also reforms related to early retirement and pensions and that have increased the participation rate of older workers the challenge now is to extend this activism to groups that have suffered during the crisis in particular younger people and the low skilled key measures here include reducing labor market duality and shifting from a passive labor market management such as unemployment benefits the link from incentives to find a job to active labor market policies such as job search assistance and training improving the conditions for cross-border labor mobility will also be key especially in those countries that are aging more rapidly for example the OECD projects German potential growth to decline below 1% by 2020 on account of skill shortages in addition higher immigration may imply stronger private demand dynamics including higher demand for investment spending as well and third after capital labor total factor productivity is unlikely to reverse its downward trend without structural reforms to improve resource allocation by fostering competition and reducing economic rents such reforms ensure that resources and rewards flow to high productivity sectors which in turn supports innovation and technological progress a recent study found that increasing competition in tradable and non-tradable sectors in Italy could increase output by 4% over five years and even 7.7% in the long run moreover one explanation for the low total factor productivity grows before the crisis was that structural barriers were slowing down the adoption and the diffusion of information and communication technology in particular in the services sector reforms to deepen market integration between euro area countries such as for example implementing rapidly the services directives in full could therefore provide a boost to productivity through this channel these may seem to some like rather theoretical arguments on my side yet island is a very concrete working example in this thanks to prior structural reforms relative prices in the country adjusted almost immediately after the 20809 recession and the economy quickly began regaining its competitiveness the unemployment rate started to decline in 2012 when it was still at 14% and the latest figures I have seen was that it came down already to 12.3% close to the European average by contrast in other program countries with less flexible economies the recovery started much later and unemployment rates are still at much higher levels while we must be very cautious by attributing causation the significant decline in investment in Ireland over the last five years now appears to have ended capital formation in the three first quarters of 2013 declined in annual terms but if I strip out the impact from a fall in aircraft purchases there appears to be stronger underlying recovery in investment in this country all this suggests that Ireland is implementing the right kind of policies to raise its gross potential in the future and in a sustainable way that is not linked to the financial cycle the current level of Irish government bond spreads implies that this is a view that is also widely shared by financial markets however I trust that these good news will not give rise to complacency as Ireland continues we have to admit to face considerable challenges on several fronts these include certainly further repair for both public and private balance sheet they include reducing the still high rates of unemployment for the long-term unemployed as well as for the high level of young unemployed and they include restoring the functionality full functionality of the banking sector so that it is able to support rather than hinder the domestic economy as it emerges from the crisis let me conclude the challenges the euro area is facing today to raise its gross potential are not new since the 1990s we have known that supply conditions in the euro area needed to be reformed this was also the aim of the failed Lisbon agenda and indeed it was in this context that someone who I know particularly well from Luxembourg was quoted by saying making his famous quote about the apparent inconsistency between reform and being reelected what is new today however is the urgency for action we are facing the risk of a structural setback in gross we can therefore no longer afford to delay and we can also not afford to overburden monetary policy structural reform is a must for this reason the apparent contradiction between reforms and reelection may now be moot simply because citizens want gross and without gross it will not materialize without reforms gross will not materialize there's no country in the euro area that has delayed reforms and achieved economic outcomes with which their citizens are content when I think of the euro area today I am some extent reminded of Winston Churchill lying about always doing the right thing after exhausting all the alternatives well we have spent two decades in Europe exhausting all the alternatives so now I trust that the only path that is left to us is finally the right one thank you for your attention