 Ladies and gentlemen, good afternoon, and welcome to the second DAW Europe lecture. We're very honored and very pleased to welcome you in particular, Mr. Draghi. It's a great, great pleasure, great honor for us. And of course I welcome all of you. It's great to have this room full and I'm really fantastic to see so many faces and I'm looking forward to this lecture. Europe today is standing at a crossroads. Europe is still experiencing a deep, deep crisis. And in a way, if you look at it, it's not just one crisis Europe is experiencing, but it's four different crises. It's an economic crisis. The euro area has barely recovered in terms of economic activity, where we were in early 2008. As a second crisis, Europe still has a very deep financial and banking crisis. And if you look around in Europe over the last few weeks, it's very clear that you see how deep that banking crisis is. As a third crisis, we have a steep, still a very deep debt crisis. Some countries are sovereign debt, in others it's corporate debt or household debt, but that's a third huge challenge. And fourth and probably most importantly, Europe has a confidence crisis. So a lot of households, a lot of citizens, a lot of people, companies, investors ask, what are the politicians doing in Europe to pull Europe out of the crisis? What reforms are they doing to help unemployment recover or be reduced and the economy to recover? To me, the biggest challenge of all is what we see in the national capitals, that we see a renationalization of economic policy and more generally of politics in the member states. So more and more, we see that politicians are asking or believing, that what is good for Europe is bad for the national interest. And that's the wrong perception, that's very tragic or very dangerous perception, because it means that cooperation among European leaders, among European politicians, has weakened and it makes it much, much harder to have a coordinated policy approach to get out of the crisis, to regain growth, to reduce unemployment sustainably and to have financial stability restored. I think the important point here, that to me is tragic, is that we don't realize that Europe can prosper and do well in the long term, only if we pull together, if national capitals pull together and act in a common European interest. And in particular in this country in Germany, we must realize that we are so interdependent in Europe. In Germany every second job depends on our exports to other European countries in particular, that we need to realize in the long term, prosperity, growth, high employment, welfare is only possible as a joint common Europe that's pulling along and coordinating policies well. The purpose of this DAW Europe lecture series is to create a public sphere or to use a European public sphere. Our task as a research institute, as the largest independent research institute, economic research institute in Germany is to inform the policy debates, to be critical, to show alternatives, to show options, to create a debate and to inform that debate within Europe, in particular here within Berlin and that's the idea, that's the objective of us as an institute but also of this lecture series to have this policy dialogue on Europe, on the future of Europe. I want to say a few words about the organization. Mr. Draghi will now deliver his speech. After that we have the opportunity to raise questions, to have a Q&A session with the confirmation of the invitation. We had asked you to send questions to us so we could pose them to him. I will do that. We received a large number of replies and I will ask these questions to Mr. Draghi afterwards. We have 10, 15 minutes for that and that will conclude the lecture. I want to say a few words about Mr. Draghi himself and to me Mr. Draghi is a true European and one of the very, very few European policy makers who truly acts in a common joint European interest. If you look at the different national interests, I mean I mentioned it up front, I see this re-nationalization and he is one of the few who really always argues truly in a European perspective, taking your Arab perspective and focusing on that. And the ECB certainly has been in a very, very tough spot over the last few years being torn among these national interests. Some wanting a more accommodative monetary policy, others a less accommodative monetary policy, everyone has in their own interest and the ECB has been trying to navigate those waters and truly focus on the euro area as a whole. And the ECB I think this is also quite uncontroversial has managed to pull back Europe from a much deeper crisis several times in the past, starting in 2007 when the global financial crisis first showed its signs in September 2008, every one of us remembers 2012 when Europe was really on the brink of economic catastrophe when the politicians with the announcement on banking union didn't manage to stabilize in car markets, but the ECB had to step in and restore market car and more confidence in financial markets. So for that the ECB has played a very important role and we are very, very much looking forward to your speech Mr. Draghi and so I would like to ask you to please join me in thanking him for coming and we are looking forward to your lecture. Thank you. Thank you Mr. Fraschers. Thank you for your kind words and thank you very much for this invitation. It's both an honor and a pleasure to be here with you. Let me just go through this lecture and then we can have some Q&A as Mr. Fraschers just said. The most salient feature of the landscape facing monetary policy today is the low level of nominal and real yields everywhere. Among the G7, three countries currently have negative yield in five-year bonds, Germany, France and Japan, representing about 14% of the world's GDP and that proportion rises to 22% if we include bonds yielding less than 1%. Some observers see this as an artificial state generated by the policies of central banks and argue that it threatens not only economic and financial stability but social equity too. So what I would like to discuss in my remarks today is why interest rates are so low and what the implications of those low rates really are. My focus will be in particular on the distributional effects of monetary policy. Low yields are not merely a legacy of the crisis that beset the global economy in 2008. Taking a wider view, long-term interest rates have been on a downward trend across the global economy for the better part of the last 30 years, as you can see in chart one. This trend has certainly had positive drivers, namely the success of central banks in advanced economies since the 1980s in achieving price stability and in anchoring inflation expectations. This has reduced both expected inflation and the inflation risk premium embedded in long-term interest rates. The taming of inflation explains a large part of the initial fall in nominal yields in the 1980s and 1990s. But there are also more worrying drivers. Behind the fall in nominal yields has also been a fall in real yields and this has been attributed mainly to three factors. The first is a secular slowdown in productivity growth across advanced economies coupled with pessimistic expectations about growth potential in the years to come, which has reduced the expected rate of return on capital. And if that real rate of return falls, it is logical that firms will only be willing to borrow at lower real rates. And this is reflected in lower long-term real yields. The second factor is a global imbalance of saving and investment, which has led real yields to fall even relative to growth prospects. On the saving side, a global saving glut, as was defined years ago, produced among other things by aging populations has bid up the price of safe assets at the time when the supply of those assets has been shrinking, thereby compressing real yields. Factors such as the decline in relative price of capital goods have also led to a fall in desired investment. And this has been exacerbated by the third factor, the debt overhang in the public and private sectors bequeathed by the financial crisis. This has further raised saving as all sectors the leverage and depressed investment and consumption. As a consequence, the natural rate of interest, which is the real rate of interest balances desired saving and planned investment at a level consistent with output being at potential and stable prices has fallen over time to very low or even negative levels. And whatever the drivers behind this, central banks have to take it into account and cut their policy rates to commensurately lower rates, lower levels. Indeed, the way standard monetary policy works is to steer real short-term interest rates so that they shadow the natural rate, which keeps the economy in balance and prices stable. When inflation is below our objective and there is a negative output gap, monetary policy has to bring real rates below the natural rate to provide enough demand support. And when inflation is above our objective and the output gap is positive, the reverse is true. If central banks did not act in this way, that is if they did not lower short-term rates in tandem with the natural rate, market rates would be too high relative to the real returns in the economy and investment would become unattractive. The economy would therefore be pushed away from full capacity and price stability. By contrast, by holding market rates below the real rate of return, we encourage the investment and consumption that is needed to bring the economy back to potential. There are, of course, limits to how far central banks can shadow a falling natural rate with policy interest rates, since there is a lower bound for interest rates set by the existence of cash. But even when monetary policy approaches this point, central banks can still stimulate the economy through the same mechanism. This is because we can still influence the whole constellation of market interest rates and asset prices in the economy that determine real investment and consumption decisions. Through forward guidance, we can flatten the risk-free curve. Through asset purchases, we can compress additional risk premium, both directly in the markets where we intervene and indirectly through the portfolio rebalancing. And through long-term loans to banks, we can bring down bank lending rates for firms and households. And this is precisely why the ECB has adopted a series of new unconventional measures since June 2014. To continue providing uplift to the economy even when policy rates approach the lower bound. These unconventional measures follow exactly the same logic as the conventional ones. They make financing conditions more expansionary relative to the natural rate. And in doing so, bringing the economy back to balance and inflation back to our objective. But while our monetary policy seen from this perspective is simply a continuity what central banks have always done and should always do, we know it has raised concerns. Those concerns have focused in particular on the side effects of monetary policy and its distributional consequences. Between savers, distributional consequences, between savers and borrowers, weaker and stronger countries, the rich and the poor. The question in short is whether there is a trade-off between stability and equity. But to answer this, we have to make a distinction between the financial and the macroeconomic effects of our policy which arise over different time frames. Over the medium term, it is unambiguous that monetary policy has positive distributional effects through the macroeconomic channels. Most importantly, it reduces unemployment which benefits poorer households the most. For this reason, research from the US and the UK has shown that monetary policy actions that boost the economy reduce the income inequality over the cycle. And a faster return to full employment should in turn contribute to lower future inequality. Since we know that if unemployment lasts too long, it can lead to permanent income losses through what's called the labor market scarring. Securing price stability over the medium term also supports intergenerational equity. By preventing arbitrary redistribution due to unexpected changes in prices. Indeed, data for the Euro area suggests that unexpected inflation undershooting results in a redistribution of nominal wealth from younger to older households since the young are net debtors while the old are net creditors. And both savers and borrowers ultimately benefit from an effective monetary policy too since it increases returns on all types of financial and real assets including deposits. Certainly, some savers might suffer from a temporary period of low interest rates especially if they rely on interest income not smooth their consumption through credit. But whatever financial assets savers hold in the final analysis, their return always depends on the growth rate of the economy. It is therefore in savers' interest as well that growth doesn't remain subpar for any longer than is necessary. And hence that we avoid any permanent damage to potential growth through the so-called hysteresis effect. Otherwise, financial returns for savers would end up permanently lower over time. It is nonetheless conceivable that in the short term monetary policy might have undesirable distributional effects through the so-called financial channels. Monetary policy directly affects asset prices and interest rates which redistributes wealth and income among different economies, sectors and households. This is the case for all monetary policies. Indeed, it is one of the channels through which monetary policy works. What some fear, however, is that our current monetary policy of very low interest rates and asset purchases might exacerbate and worsen those distributional effects. One concern is that it penalizes poor savers who rely on fixed income while benefiting rich asset holders through capital gains. Another concern is that monetary policy redistributes income from stronger countries like Germany to two more vulnerable ones. So the question we need to examine is two-fold. In the short term, are the financial effects of policy creating regressive or unwelcome distributional effects in the Euro area and in individual countries? And over the medium term, how is that being offset by the macroeconomic effects of our measures? This is ultimately an empirical question. So let us take a few moments to look at the effects our monetary policy measures have had, and in particular, the unconventional measures we have taken since June 2014. Monetary policy has two types of financial effects, on income and wealth. First, when the central bank cuts rates or buys assets, there is an inevitable redistribution of financial income across economies and among different sectors and households within those economies, according to their net financial position. The component of financial income the monetary policy affects most directly is net interest income. So it's useful to look at how the net interest income of different countries and sectors has been affected by falling interest rates during the crisis. We can estimate this by looking at how the return on the existing stock of assets and liabilities has changed during the crisis. What we find is that for large countries such as Spain and Germany, the effect of low interest rates on the total economy has been positive. That is, they have received more in interest earnings than they have disbursed in interest payments, which you can see in chart two. The same is also true of the euro area vis-à-vis the rest of the world. For Germany, this result reflects two factors. First, the fact that in spite of its large net international investment position, the economy's stock of fixed income liabilities has closely tracked its stock of fixed income assets. And second, the fact that the drop in interest rates on those liabilities has been significantly larger than on its assets. Since Germany has acted as both a safe haven for investors during periods of financial stress and as the premier safe asset provider in the euro area in the context of the shrinking supply of AAA rated government debt. Now, it's not possible to say definitely from the data whether these results are due to shifts in interest income within the euro area or vis-à-vis the rest of the world. But from what we can tell, there are no signs that low interest rates are shifting financial income away from stronger countries and towards weaker ones, as is often claimed. In fact, the redistribution of financial income within countries, that is, across sectors, seems much more important than the one across countries. For Germany, we can see that the government and non-financial corporations have made large, windfall gains. The household sector, often thought to have lost out the most in Germany due to its large net saver position, has in fact only recorded a mild loss in net interest income since the household's borrowing rate has fallen more than the lending rate. And if one runs the same exercise from mid-2014 when our credit easing began, the household sector actually accrues a slight gain. In Germany, the financial sector has been the most affected. But this has been driven more by the earlier falling interest rates in 2008 than the impact of our measures since mid-2014. That's an issue I will return to later. Such sectoral aggregates will nevertheless always mask a wide dispersion of effects across households. This is not straightforward to measure, but we can make some inferences from the Euro Systems Households Finance and Consumption Survey. Two waves have taken place so far, in 2010 and 2014, which gives us the possibility to see how net financial income has shifted between different households as interest rates have fallen. In this period, two-year Euro area benchmark bond yields fell by 130 basis points and the 10-year bonds by 110 basis points. What we see is that for the whole Euro area, net financial income as a fraction of total household's income fell slightly, which is consistent with the sectoral picture above we saw before. But behind this was some progressive distribution across net wealth groups, as chart 3 shows. The households with the lowest net wealth had an unchanged position, since their debt payments are higher than their financial income. And the wealthiest households lost the most as their financial income is much higher than their debt. The same story was broadly true if we look at Germany. Certainly, within these groups, there may still be savers who are poor in terms of income who are losing out significantly from low rates. But we do not see evidence that those who are suffering most are poor in terms of wealth. In fact, what these data suggest is that savers and the wealthy are on the whole the same people in the aggregate, of course. Still, the distributional picture also has to take into account the second type of effects, wealth effects, which capture the impact of monetary policy on the value of financial assets. Are those effects accruing mainly to the rich and so worsening wealth inequality? Here again, our household financial consumption which is a big survey run across by all the central banks of the euro system allows us to make some suggestions. What we see is the euro area households that hold financial assets, stocks and bonds are strongly concentrated in the top end of the net wealth distribution which is shown in chart 4. As such, only a fairly small subset of the population benefits from capital gains in bond and equity markets. Three-quarters of the population fail to benefit at all. Home ownership, by contrast, is more evenly distributed across wealth groups. The median household thus benefits much more from housing price increases. As a result, wealth inequality tends to increase when, in particular, equity prices rise but tends to fall when housing prices go up with the heterogeneity across countries. Inequality falls more in those countries with high home ownership rates while in countries with low ownership rates the effect is weaker. What is the situation in the euro area today? In this case, the period we are most interested in is the one since mid-2014 and it is mostly asset purchases that need to create wealth inequality through asset price inflation. And while the data doesn't cover that period we can look at the wealth held by households in mid-2014 and apply to that the movements of stocks, bonds and house prices since that time. What we observe is that for the euro area has been an absolute gain. Old net wealth groups have seen their wealth increases share of their mean income which you can see in chart 5. This is because house prices within the euro area went up over the period while bond prices on average rose modestly and stock prices on average actually fell. Higher net wealth households however benefited more in relative terms. This result is partly driven by the situation in Germany where home ownership is comparatively low and hence the median household benefits less from rising house prices. Still over half of German households have seen net wealth increases over the past two years. And in Spain households all along the wealth distribution have benefited given the high rate of home ownership. So overall we do see some signs that wealthier households have benefited relatively more from increases in asset prices but those benefits have also been broad based meaning the effect on distribution is unlikely to have been large. And it's important to remember that to the degree that monetary policy has boosted asset prices it has often been correcting previous faults in asset prices due to the crisis. In this sense monetary policy has not been distorting the distribution of wealth but rather restoring the distribution of the status quo ante. In any case a balanced assessment of the distributional effects of monetary policy cannot focus only on its short run financial effects must also include its more slow moving macroeconomic effects. Even if low interest rates and high asset prices do worsen short run inequality they have positive distributional effects over the medium term. They lead to stronger aggregate demand a faster fall in unemployment and medium term price stability all of which reduce inequality in the ways I described above. The income gains support firms profitability which ultimately sustains higher investment. Redistribution of income across households is typically expansionary as well given that liquidity constrained households have a higher marginal propensity to consume than more affluent ones. And the wealth effects of our policy which have been spread across all net wealth groups boost the economy to the degree that households are able to convert asset price rises into consumption. Alongside this are also the expansionary effects that monetary policy creates through its other channels the exchange rate channel and the inter-temporal substitution. Low interest rates encourage households to bring forward durable consumption and firms investment through credit. Looking at the euro area today what is immediately clear is that since our credit is in package in June 2014 we have been benefiting from a more broad based and domestic demand driven recovery. As chart 6 shows this was not the case during 2009-2011 recovery which relied heavily on net exports. And as the economy has strengthened we have indeed seen the unemployment rate falling significantly. Pinning down the precise contribution of monetary policy to all this of course it's challenging but we can see in chart 7 since June 2014 that our measures have triggered a downward convergence of bank lending rates and an upward trend in credit volumes with borrowing costs in vulnerable countries now approaching those enjoyed by Germany and other stronger economies. Lending terms and conditions for the small and medium sized enterprises have also converged rapidly towards those of large scale borrowers. This has been driven in part by the reversal of the unwarranted financial fragmentation we saw in 2011 and 2012 but it also reflects a second factor. Our measures have helped break a vicious circle between bank lending rates macroeconomic outcomes and credit risk perceptions in vulnerable countries. When the economy was weak banks tended to increase lending rates because they feared a higher probability of default. That choked off credit demand worsened the macro situation and increased the linkances. Those high lending rates were then validated exposed. But starting in the summer of 2014 our measures began to increase competitive pressures on banks to reduce lending margins. Bank credit therefore became more affordable which in turn stopped higher credit demand and as that has fed through into a better macro picture loan delinquencies have fallen. Accordingly bank lending rates have fallen too and the vicious circle has turned into a virtuous circle. So our credit easing has helped reverse and negative distributional effects in terms of access to finance and that is now fading into aggregate demand through the most intersensitive demand components namely consumption of durables and investment. After several years of contraction consumption of durable goods in the euro area has been rebounded growing at rates not seen since before the crisis. Monetary policy has been a key driver. In particular in countries where credit was previously very tight there is a close correlation between durables consumption and the improvement in credit conditions as recorded in one other of our surveys the bank lending survey. The contribution of investment to growth has also been steadily rising the sensitivity of investment to borrowing conditions seems true to be lower than it was before the crisis. Yet monetary policy appears to be having an endogenous impact on investment via aggregate demand. Its growth path is relatively well explained by lagged but expected growth the so-called accelerator effect and though both components have grown most robustly in vulnerable economies this has had an expansionary effect on core countries as well. As export demand has fallen off in emerging markets since 2015 the recovery in those economies has provided in the vulnerable countries in the euro area has provided a cushion for exporters in core economies as chart 8 shows. In Germany for example intra euro area exports rose throughout 2015 as exports to the rest of the world slowed in part of setting that global slowdown increasing domestic demand in vulnerable euro area countries absorbed a sizable share of this slack in foreign demand and even vis-a-vis the rest of the world a monetary policy has helped insulate the euro area from a steep slowdown in world trade. In fact, net exports have been buffered in 2015 and 2016 by the lagged effect of previous exchange rate depreciation with the euro area exporters able to regain market shares the divergence between the monetary policy path of the euro area and that of other major economies was one factor supporting this. So, we have every reason to believe that with the impetus provided by our recent measures monetary policy is working as expected by boosting consumption and investment and creating jobs which is always socially progressive and importantly we don't see any sign of another claim one sometimes hears that low interest rates on savings are causing households to increase savings to maintain their life cycle saving targets thereby causing our policy to backfire since June 2014 there has only been a meaningful rise in the household saving rate in one large economy, Germany everyone looks at it more closely this is largely explained by an increase in residential investment among German households financed out of current income the net lending position of German households has barely risen in other words, decisions by households are supporting the macroeconomic objectives of monetary policy not countering it this is also confirmed by survey evidence the Bundesbank has found that just 1% of German households are saving more because of low interest rates so, if we net out these effects of the financial and macroeconomic channels I find it hard to reach conclusion that over a longer time frame the outcome of our policy has been or will be to redistribute wealth and income in an unfair or unequal way that is selling not true across countries and there isn't much to suggest it's true within countries either what is more, as a recent study by the Bundesbank points out those who claim that monetary policy worsens inequality typically do not consider the counterfactual they take the distributional situation as given but forget that monetary policy is acting precisely because the macroeconomic situation was at risk of changing for the worse in fact, according to ECB simulations the Euro area GDP would be cumulatively at least 1.5% lower between the last 3 years, 2015-2018 without the expansionary monetary policy measures we have adopted since mid-2014 and also the outcome for inflation would be decidedly worse yet, all this doesn't mean the very low interest rates are costless we are aware of the other distortions that can result from them indeed we would certainly prefer not to have to keep interest rates at such low levels for an excessively long time since the unwelcome side effects may accumulate over time the financial sector provides a good example as I showed above, its net interest income has declined and that is not necessarily a problem right now since at least for banks lower net interest margins are being partly offset by higher asset valuations and a more robust recovery which in turn creates further demand for bank credit and reduces loan delinquencies but as very low interest rates persist some of these offsetting factors such as capital gains will diminish and the drawbacks will remain in place for instance, the downward stickiness of interest rates on retail deposits or we should seek to create the conditions for a return of interest rates to higher levels and this requires two types of actions the first are actions to bring output back to potential without undue delay so that inflation can return sustainably to our objective and policy interest rates can rise back to the natural rate that is the best and indeed the only way for monetary policy to normalize and this is why looking ahead we remain committed to preserving the very substantial degree of monetary accommodation which is necessary to secure a sustained convergence of inflation towards levels below but close to 2% over the medium term this is exactly the language we used in the last press conference on monetary policy a week ago but it is also clear that the more other macroeconomic stabilization policies work alongside monetary policy the faster the closure of the output gap will be still returning to potential will not solve the fundamental problem we started with the fact that the natural interest rate is itself very low it is this that is ultimately driving interest rates down to zero near zero so the second type of actions we need if we want interest rates at higher level are those that can raise the natural rate and this requires a focus on policies that can address the root causes of excess saving over investment in other words fiscal and structural policies high saving can be partially mitigated by public policies but it is only so much that one can do use saving in an ageing society like the euro area thus most important is a focus on raising investment demand and this hinges crucially on structural reforms to reverse the declining trend in productivity and it depends on governments enacting investment friendly tax and regulatory policies as well as reversing the stagnation of public capital stock we have seen since the crisis and in many countries way before the crisis with investments aimed at raising productivity in short, monetary policies today protecting the interest of savers by ensuring a faster closing of the output gap and preserving the economic potential on which savers income depends but for real returns to rise further still other policies need to buttress monetary policy by raising investment and productivity thank you Thank you very very much Mr. Draghi for a fascinating speech I must say I thought I knew everything about the impact of monetary policy but I realized I'm wrong I wasn't aware of the impact of particular equity on the households with low wealth that was fascinating, very very interesting what we did now we have collected questions and I want to raise because we've got many we cannot raise all individually so we collected a few that are representative and I will at least mention the name of the persons who have raised them the first in particular that actually links very much to the impact of unconventional monetary policy measures you talked about in particular since summer of 2014 how they have worked and the first question comes from Malte Rie a colleague of mine at DAW Berlin who asks, Dear Mr. Draghi what do you think are the three main risks associated with unconventional monetary policy I don't know why he mentions three maybe you have two or four but the question is what are the risks associated with these policies Thank you, thank you Marcel let me thank you all for having resisted through this lecture which I'm perfectly aware that it's as interesting as this is also dense compact and perhaps difficult at some point so thank you so much for that but let me now come to the answer for some time the greater risk the greatest risk we had was not acting thinking that everything would be once and for all that we could look through developments because they were temporary blips and so that was the greatest risk we overcame that risk with a series of policy measures that really started always mentioned mid-June 2014 but in fact the sort of the different perspective to our monetary policy started at least a year earlier right now the there isn't any special greatest risk to our monetary policy we are perfectly aware as I think I said during the speech that low interest rates for a long time with plenty of liquidity are a fertile ground for financial stability risk we watch this risk very carefully both through our supervisory arm, the SSM and through the macroprudential arm of the ECB we have so far we have no sign of financial stability risk we've seen some asset prices rising especially in the housing sector these rises have been quite localised however and very importantly have not been accompanied by a corresponding rise in leverage what made asset price increases potentially a risk for financial stability before the crisis was that these price increases were accompanied by a marked increase in leverage quite the contrary now we are seeing that in fact credit developments are positive have been steadily increasing in the last since the beginning of 2014 gradually picking up we move from what is minus 3 or minus 2% monthly growth to a plus 2 or plus 3% monthly growth but we're still in a subdued situation so we don't have any sign that credit is actually feeding into financial stability risk I mean one risk that is very often mentioned particularly in Germany in the discussion is the risk of moral hazard so that governments all over Europe not just in Europe also globally but in particular in the euro area may use the monetary policy the very accommodative monetary policy to delay required necessary reforms would you agree that this is an undesired or how did it be the risk associated with these policies? No, no the answer is no I wouldn't agree with that but since it's something that's been discussed for so long in many different parts and by very I would say some of the proponents of this view are actually very authoritative we've given a lot of thought about this first of all often in various parts of the euro area our monetary policy is presented as if it were the only thing in the world we are actually doing the monetary policies being acted upon by virtually every central bank in the world every large central bank in the world so we're not necessarily inventing something here but let me come to the specific question is it true that monetary policy let me make the general lose monetary policies create a dissent for governments so first of all is should we take in seriously this question should we act saying okay now we are going to do a monetary policy which I believe it's wrong but may exercise some effect some pressure upon governments so they will finally reform themselves I don't think that's a valid reasoning we would basically betray on our mandate which is to pursue price stability and second I'm not sure that governments like to be pressed by unelected bureaucrats as they call us so and it's not written anywhere that we should do so so there is a problem here second let me look at the empirical the evidence we have in front of us over the last four or five years it's true that certain policy measures have been undertaken under the pressures of markets and by and large these measures are related to the budget quite naturally quite unsurprisingly if it's difficult to finance a budget because interest rates are very high people will actually try to do something about that and so we had some pension reforms and then some sort of budgetary consolidation when we look however when we look at how this consolidation had been undertaken I have some doubts because what politicians, what governments do under pressure they usually do the easiest thing and the easiest thing is to raise taxes and cut public investment which is exactly what we don't want because that would lower potential growth but as far as budget-related measures there may be a link but when we move out of the immediate budgetary related policy measures or structural reforms we find actually this link become very weak for example the labor market reforms that had been undertaken in Italy and in Spain had been undertaken when interest rates had been low for quite a time already so there wasn't any link direct link with interest rates of course there was a link saying what can we do to become stronger to become more competitive and avoid finding ourselves in the same critical situation as we were during the crisis where we discovered our inherent weaknesses and so that's the reaction to but not necessarily to interest rates but then when we move even further away from the other very important perhaps even more important structural reforms like for example the constitutional reform the electoral law the judiciary reform that some countries need the education reform do we really think that they depend on the level of interest rates? I hope I don't have to answer that question for me this links very nicely to a next question and this next question comes from Lukas Nüse from the Bundesministerium für Arbeit und Soziales Federal Ministry of Labour and Social Affairs and he says Dear Mr Draghi, what role do you see for central banks in an environment of declining potential growth and a declining natural rate of interest does a possibility of a secular stagnation concern you? Well it certainly does but as I think I touched upon during the speech there are different and competing explanations to some extent competing explanations of why growth is low one is the secular stagnation another one is that the very large productivity changes that have characterized the high growth years are over a third one is the legacy coming from the debt overhang that has been piled up during the crisis so if this is the depending on what answer the perspective for the future are better for example if we think it depends on the overhang of debt then certainly the leveraging process that is being taking place now in the Euro area it makes people think positively as far as the future is concerned in other words debt is going down and that is a positive sign on productivity the answer is I don't know if it's true or not this is a thesis which was put forward especially for the United States my sense is that in the Euro area we have a long way to go before we exhaust the productivity improvements that have already taken place in the US in other words maybe in the future there will be a maximum limit to productivity but right now it seems to me that we are very distant from that that of course links to the investment issue we mentioned because investment of course yes exactly it's very important that and here its government policies are very important not necessarily in the sense of stimulating public investment although it may be important to do so especially for investments that raise productivity namely education digitalization but also in another way environment investment friendly and there is a lot we can do about that I have a third question by Thomas Obst from the Europa Universität via Drina Frankfurt and it's actually it has two parts the first part is is the current monetary policy the new normal and how long can we live in a world of quantitative easing with negative real interest rates and well let me ask that first and then at the second one later no certainly not it's not the new normal we entered these measures with these measures in June 2014 and as said in the speech we'll kind of get out of these measures when we'll have price stability objective reached as I said last week in a sustainable way namely in a way that can be sustained without exactly without the support, the extraordinary monetary policy support that's in place today second part of that question again from Thomas Obst is how can the ECB keep Europe away from the risk of deflation or do you see a risk of deflation how can the ECB keep Europe away from that risk well I am very thankful for this question because the answer is we succeeded thank you good that was a very short answer and now one question that also came up in many discussions in Germany is related to target 2 everyone in Germany I guess has heard of target 2 I guess hardly anyone really understands the technicalities behind it but still there is a big fear of target imbalances that had risen enormously after 2012 that declined significantly now in recent months we saw again an increase is that something we need to take seriously as a risk well the recent rise in target 2 balances has nothing to do with lack of confidence in the euro area with the sort of risk that characterized the euro area in 2012 and 2011 and 12 when Germany had become the safe haven for savings all over the euro area now it's different it's a specific technical reason and it's due to where the counterparties to our APP program settled their exchanges in other words when central banks buy bonds they buy bonds all over the euro area 80% of the counterparties to these bonds to these bond trades do not reside in the country where the buying central bank is they reside in another country also and so they settle these exchanges in other parts of the euro area and then you have the very large counterparty which is outside the euro area and most of them settle these exchanges with the Bundesbank and that's why you see target 2 balances going up because lots of exchanges are being settled in Germany via the Bundesbank or these counterparties access the target 2 via the Bundesbank and that's why you see the target 2 balances going up but basically it has nothing to do with lack of confidence and so on then maybe if you ask one last question I would like to raise before closing and that's a future about the future of the euro and the question is the following what is missing to make the euro sustainable who is responsible how optimistic are you that these reforms will be implemented in the coming years let me try to of course in responding to this question I kind of also reveal my personal perceptions at this point in time. Often now there is a widespread sort of pessimism but in fact if we look at European integration it is proceeding it is proceeding. It's not proceeding in the areas we would have thought more important two years ago but it's proceeding in the areas which are which in a sense are closest to the citizens interest namely migration security defense so integration is moving forward but in these areas and these areas are the ones that our citizens ask for more action from Europe from from settling from nation states but many of these problems are bigger than a nation state and so they should be coped with at the super national level. However we shouldn't lose sight of the fact that the euro remains vulnerable if the monetary union isn't finished if the banking union isn't completed if the capital market union isn't achieved so that and whatever is all the other actions that are linked to that remain on our radar screens but in a sense the other needs are more pressing at this point in time and to think about different priorities I think it wouldn't wouldn't be really heard by our citizens now. So maybe a very final word on the on the on the second part of the question how optimistic are you? I think it's in a sense it's a biased answer how can expect a neutral answer here. I am optimistic because I'm convinced that all of us at heart are convinced by our persuaded think that the European project is fundamental for our lives our futures our sons our children's future it's the it assesses the biggest project that these countries have been able to achieve to undertake in the last 78 years and I would whenever I feel pessimistic or worried about the future I would ask myself what are the origins of this project why have we decided that it's better to work together rather than going on our own and it's a relatively new thing if you think for centuries we've gone on our own and then at certain point we decided that probably it was better and if anything everything that's happening in the world since then tells us that it's much better to work together because the supranational nature of the problems is all-encompassing in other words the problems that have that cannot be solved at national level had become many more than they used to be 70 years ago thank you that's a wonderful final words so thank you very much my driver