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 gray 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,

Philippe Hartman and Frank Smiths, and also work by the team of Massimo Rossano. Where are you, 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's 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 there. The third section that you see here, I think, fits very well with actually the concluding remarks of Mario, but also Olivier, yesterday evening, is macroeconomic stabilization beyond monetary policy.

Basically, it's 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. On the mandate, I think I have 17 slides, so I will go relatively quickly on them. No, no, I will go. It's not too difficult.

On the mandate, colleagues, former colleagues, 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 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 effects 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 bond at that time. Othmar, 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 bond 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 adjustments within the monetary union. So that's 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 compare 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're 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 and the trend to 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 the 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 now 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'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 oil 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 only here at that time when you were, you know, the wheel and the dock that didn't bark at that time,

where you see the shift to a more targeting, 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 point, for example, when you see the core goes down, when inflation goes up, headline inflation goes up. There are other factors, like the Hartz 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, you know, 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, it's 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 that 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, I didn't get it, I think. So I think I complement what Mario was saying.

Monetary policy deliberations were and are still informed by two complementary analyses, 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 monetarist 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 they 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 space this cross-check. We always repeat a little bit, a cross-check confirms the economic analysis. I thought it would maybe, the time for, Philippe, you're there, it may be the time to reflect a little bit about this,

because I had a little bit of 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 to price stability, as did the economic analysis. But, and that's maybe for you, Marcus, 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 this 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 pass-through of non-standard measures via the banking sector to the lending conditions.

Thanks also to the colleagues from the Governing Council, the staff had access to very detailed balance sheets of banks. And we can, we can, the staff can, I mean, for me it's the past, but we can, the staff can, difficult to adjust,

the staff can trace the money. So when you go for tell-trolls, one of the measures, you know bank for bank what they did and what is the pricing that they apply to the different facilities you do. So that's what was extremely important in our deliberation, is it efficient, not efficient. We could make, for example, cluster the banks between vulnerable, the banks that came to the tell-trolls,

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 inter-banking 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 and ensured that market turbulences 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 an orderly deleveraging of the banks so you know they're not forced to sell,

and by doing that, you hope that there will be no real effects on the economy basically. That was basically the principle, so the stance could continue, and those operations acted as a complement to conventional interest rate policy, not as a substitute.

Also during the sovereign debt crisis, the sovereign bond purchase program, the S&P, 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 S&P purchases were sterilized.

So you see that separation principle, provide liquidity, but the stance can be separated by the issue. The tightening of monetary policy in July 2008 and April July 2011, in parallel with continued abundant liquidity provision, have been controversial.

So I will give you a little comment on this. I look 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 second-round effect at that time.

Inflation was 2.7% when rates were 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 second-round 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, if you could see in the previous graph, was slowing down 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 were material. The other point, which was the impact of 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 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 aspects. And the second was also, I call it later, the sort of catch-22 problem,

where countries were somehow forced 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. So that 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 2011. That was quickly reversed in August 2011. But at that time, I think we were a little bit 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, the fiscal tightening were not sufficiently taken into account in the picture, I think, at that time. It was quickly reversed, one must say, but still. A new phase of monetary easing, as I said, started in August 2011, with also additional liquidity provision measures.

This is the reactivation of the S&P to include Italy and Spain, LTRO, VLTRO. This was not sufficient to stabilize financial markets. A number of member states were caught in an adverse feedback loop. Risk-prehuman price into government yields of a few countries reflected increasing probabilities

that those countries would leave the euro, 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 the European banking union, making explicit reference to the need for breaking the sovereign bank nexus. Already before, it was agreed to put in place the ESN by October 2012. In July 2012, there was the speech of Mario. In August, too, you remember Mario, when you came back to the ECB,

and then we had the governing council, we announced that it would introduce the OMT program, as you explained. Now, the impact, as you can see in the different graphs and also here, was substantial. I think 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 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 the 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 the timing, I think the timing was very well chosen, and it was also because not many weeks after this summit,

there was a ground there that the institutional weaknesses would be addressed, and there was the right timing to send 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, downside 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 three sets of measures were designed and progressively structured. So there was a sequence, you start with negative rates and other things are introduced,

but at some point, we started to structure 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 this was in order to reach maximum effectiveness. So we talked about a complex package of mutually reinforcing measures.

I can demonstrate that, but I don't know if 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 tell-through. I think also what Mario was saying, the zero lower bond story, when we went negative in June 2014, the Governing Council thought that it was very important to signal

that the lower bond 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 liquidity 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 composers 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 OAS rate in 12 months time, and you see before, in January 2013, 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 term of the market, but not only it spread even beyond that to the long end of the bond market. As you can see, the difference between the U.S. long-term rates and the European rates,

the euro area rates after the forward guidance on rates. So at the time of the taper tantrum, we had a disconnect between the U.S. 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 in terms of size and 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 in my mind what triggered that reflection of using the balance sheet capacity in my mind was when the banks started to reimburse the term liquidity facilities that we provided, 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 started 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's 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, if you look at that, it's very interesting. 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 the balance sheet, given the programs we had, like the covered bond purchase program and the TELTROs at that time, will have a sizable impact of our balance sheet, which was 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 just create excess liquidity, which puts an exert of pressure on the short-term curve,

on the more short to medium term of the curve. So that 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 sent this message, and then we started to purchase government bonds.

This was uncharted territory, so 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 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 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? This is an important point. Good understanding of market sentiment and good communication and disclosure to the markets, what I call usually the two-way street. It's not a question of dominance, it's a two-way street.

It was essential, and that's also very often a discussion, are you dominant, do we dominate the markets, how does this go? It goes two ways, and our program was, I think, quite successful, in the sense that it created the very easy financial conditions that were needed to bring back inflation to our aim. And that you can see, this is a table that is extracted from the Hartman and Smith's paper,

and that you see a table with the description of the instruments, and here you see the effectiveness via, on the left, the term structure of OAS 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 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 underutilization,

so that's a sort of U6 measurement, like in the U.S. You see, and on the vertical, you 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, as was said before, from wages to inflation.

So we look very much with the stuff about 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 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 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 has 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, and 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 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 2014-15, 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 these periods, 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 that time, so I mean, we draw the lesson of all this. So that's one issue, fiscal policy. The second, I think, is probably one of the, for me, one of 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, 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 been achieved during the bank sovereign debt crisis, banking union and crisis management, but this is still unfinished work.

There are very different visions, and that's also, Marcus, you will come with that. There are still very different visions across countries of 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 the fundamental differences about what is the vision of,

yes, we are ready to address some of the institutional weakness, that big 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 it's two weeks ago, so I'm a bit careful.

So the first point is that monetary policy framework has served us well. I think it's true. The ECB could... I say I'm in between. I'm in between. So the monetary policy framework has served us well. Yeah, I think it's true. Yeah, I think it's true.

The ECB could act in difficult circumstances against both upside and downside risk. And I must say, from my experience, eight years into 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 at 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 policymaking 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 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 prime stability 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 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 macroprudential toolkit, because now we have that additional toolbox, which is not, of course, as you know, it's not in the full hands of the central bank. We have a say in some of the parts of the macroprudential tools, but how would that articulate with the monetary policymaking? 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, et cetera, et cetera. 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 is, and I'm finished with that, the question is indeed what is a bit very worrisome is the different sort of visions about what is a proper institutional setting in the area.

And I think that it's about time that we have more clarity, but that's for the policymakers. I mean, it's not for the central bank really. Thank you.