Reform covers also market-led initiatives, such as the development of electronic trading platforms or consolidation in the clearing and settlement infrastructure. This was possible due to a cohesive and effective interplay of free competition, coordinated action by all market participants and policy enforcement by public authorities. The need for continuation and completion remains. Much progress has also been made regarding the integration and level of competition in product markets. Substantial barriers to free competition continue however to exist, particularly preventing the integration of services markets and effective competition in network industries. Fostering competition in these areas should also contribute to a downward effect on prices. Further regulatory reforms should be accompanied by a sustained reduction in state aid - particularly if it constitutes economically questionable ad hoc and sector-specific measures. This will help to smooth the restructuring process in product markets by promoting the entry of new players. In the end, such reforms will enhance innovation and an efficient allocation of resources. And cuts in subsidies will reduce the tax burden. These product market reforms will contribute to prosperity across the euro area and they will help to address what is the largest current economic and social challenge in Europe, namely high unemployment and insufficient employment rates. Thus far, progress with the implementation of labour market reforms has been uneven in the euro area. In some countries, significant achievements in terms of lower unemployment are already visible. Others are lagging behind and uncertainty prevails about future steps.

For instance, structural factors such as slowing of crop yield growth, fast population growth and higher income elasticity for food in developing countries would continue to support higher food prices. Policy markers would therefore need to pay attention to these developments in calibrating the appropriate degree of monetary tightening. 7. Thirdly, there is also a need to diversify the sources of growth for the region, in order to generate sustainable growth and redress global imbalance. In this regard, it is worthnoting some encouraging developments that are underway in the region. The first one is the deepening intraregional trade and increasing orientation towards domestic consumption. The robust economic growth of the regional economies over the past year has mainly been propelled by strong domestic demand, while the contribution from net exports was either small or negative. In fact, the aggregate trade balance of the region has been gradually declining since 2007, and if intra-regional trade is excluded, it has declined notably from about 4% of the regional GDP in mid-2007 to less than 2% at end-2010, the lowest in more than a decade. This gradual change in trade pattern, with regional economies shifting their export markets from deficit countries like the US to surplus countries in the region, has also been contributing to global rebalancing. 8. We also should not overlook the positive attributes of capital flows. While challenging to manage, capital inflows present important opportunities for boosting broaderbased growth. The key is to channel the capital flows into good uses, and particularly towards productive investments.