A more flexible and efficient labour market is necessary to overcome the distortions that are contributing to a deterioration in competitiveness and to provide an appropriate framework so that firms will find sufficient stimulus for job creation, the introduction of new technologies, the efficient use of factors of production and the enhancement of productivity. 8  BIS Review 45/2005  In this setting, the persistent ratio of temporary to permanent employees, which seems to have encountered a floor at levels above 30%, with the attendant negative consequences for productivity and human capital accumulation, makes it advisable to review the effectiveness of the incentives in force to hire permanent workers in recent years. This would involve redefining the measures designed to reduce non-wage costs linked to this type of employment and introducing incentives to rationalise the use of temporary employment contracts. It is also necessary to set in train a reform of collective bargaining to make the wage-setting mechanisms more flexible, so that compensation is brought into line with the specific conditions of the productive sector and of firms and with the characteristics of workers. This reform would also eliminate, or at least reduce the emphasis on, wage-indexation mechanisms. The stepping-up of investment in training, in physical capital and in technological capital in line with the objectives of the Lisbon Agenda is fundamental for boosting productivity. As mentioned, Spain has notable weaknesses in the areas of innovation and of its incorporation and diffusion in the productive system.

Indeed, this is the prevailing course of action at present, routed through, for example, the ECB Banking Supervisory Committee or the recently created Committee of European Banking Supervisors, a “level 3 committee” set up in application of the Lamfalussy approach to the banking sector. The functions of the Committee of European Banking Supervisors include promoting convergence of the supervisory practices of the EU Member States and increasing and improving co-operation between supervisors. Growing supervisory co-operation will become unavoidable as further headway is made in the necessary process of integration of the single financial market. In this respect, we cannot ignore that the pace of integration is far from homogeneous. Thus, the integration of the interbank market can be classed as full, particularly in the euro area, and very high in the wholesale, the securities issuance and the large company and bank financing markets. By contrast, the retail market remains markedly local in nature and it will only become integrated insofar as its cultural and idiosyncratic barriers are progressively lifted. The same is so of cross-border activity. Mergers and acquisitions of credit institutions have raised to forty the number of institutions with operations in various EU countries. If profitability is adequate, this trend will foreseeably continue and European institutions will keep exploring the opportunities for profitability and lower costs offered by operations of this type. Despite this, the more than 8,000 deposit institutions in the EU continue to exhibit a markedly local nature.