That is a feature that may hold future growth back, once the euro has left its past weakness behind and has appreciated considerably against the dollar. In any event, the bleaker outlook for employment and the deterioration in financial wealth were conducive to an increase in the household saving ratio, consequently reducing their propensity to consume. The sluggishness of expenditure naturally affected investment plans which, in turn, were discouraged by the decline in stock market prices, balance-sheet restructuring by the most debt-ridden companies and the tightening of lending conditions by banking institutions in certain countries. The limited adjustment capacity of the European economy was manifest in the relative lack of responsiveness of nominal wages to the economic slowdown. Job creation was affected as a result, especially in the second half of the year. This lack of flexibility, along with the rigidities of price formation in the industries least exposed to competition, also hindered the moderation of inflation rates, thereby conditioning the European Central Bank’s monetary policy decisions. The loss of momentum behind the process of reforms in 2002 is telling if it is borne in mind that the European economy is still far from achieving its goals in terms of greater flexibility and integration of the markets for goods and factors, the promotion of innovation and the incorporation of new technologies into productive processes. Generally, demand-side policies contributed to tempering the scale of the slowdown, although the potential constraints on these policies were manifest throughout last year.

First, one highly favourable aspect of recent developments in the world economy, which I mentioned in the presentation of last year’s Annual Report, is the resilience generally shown by the financial system in the industrialised countries, which has limited the adverse effects of turbulence on the real sector. This resilience continued in 2002, although there are perceptible signs that the succession of shocks and the obstinacy of certain disequilibria might have eroded the solidity of certain segments of the global financial system in some countries. There would have been no such resilience were it not for the improvements in risk management introduced in recent years and for the margin for manoeuvre built up during the boom years. Second, the response by general government, with its three-pronged executive (including here the various supervisors), legislative and legal powers, has proven prompt and effective and has allowed many of the shortcomings in market fundamentals highlighted by the crisis to be corrected. Initiatives such as the Sarbanes-Oaxley Act in the United States; the amendments made in Spain by the Financial System Reform Measures Act; the boost to international accounting convergence between Europe and the United States, based on putting principles ahead of detailed rules; the reinforced supervision of auditors; the fresh momentum to improving corporate governance, etc., have all made for some progress in improving confidence. Against this uncertain backdrop, Spanish deposits institutions likewise offered proof of resilience, along with greater strength in areas such as accounting, own funds and provisions.