Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided. The Governing Council is monitoring wage negotiations in the euro area with particular attention. In the view of the Governing Council, continued responsible wage agreements are of key importance in order to preserve price stability in the medium term and thereby the purchasing power of all euro area citizens. The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth remained very vigorous at 10.3% in March, supported by the continued strong growth of MFI loans to the private sector. At the same time, annual M1 growth continued to moderate in March, reflecting higher short-term interest rates which encouraged further shifts from overnight into time deposits. While the impact of the flat yield curve and other temporary factors suggest that annual M3 growth currently overstates the underlying pace of monetary expansion, nonetheless, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong. The growth of household borrowing has moderated over recent months, reflecting the impact of higher short-term interest rates and cooling housing markets in several parts of the euro area. However, the growth of loans to non-financial corporations has remained very robust.

Against this background, we emphasise that the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council. We believe that the current monetary policy stance will contribute to achieving this objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks. Regarding fiscal policies, the latest forecast by the European Commission points to a rise in the euro area general government deficit ratio in 2008, followed by a further small increase in 2009. This deterioration in part reflects a less favourable economic environment and a likely reversal of windfall revenues accrued in past years. However, it also reflects a standstill in fiscal consolidation and new deficit-increasing measures in a number of countries with fiscal imbalances, including some with high deficits. For several countries, the attainment of the country-specific medium-term objectives by 2010 at the latest, which is the commitment made by euro area governments in Berlin in April 2007, is clearly at risk. In these countries, much more ambitious policies are imperative. For all countries, prudent fiscal policies would also help to counteract current inflationary pressures. At the current juncture, it is also important to reinforce the structural reform agenda, in particular with a view to fostering market integration and to reducing rigidities in product and labour markets.