In this respect, flexible wage setting, resulting in particular in sufficient wage differentiation, is crucial in order to strengthen or at least maintain competitiveness and improve employment opportunities, in particular for less-skilled workers. •  Furthermore, many studies point to the potential that competition has to increase employment and to boost productivity trends by improving production efficiency and by enhancing the incentive to invest and innovate 1. In the European Union, significant progress has been made in strengthening competition and increasing economic integration over the last two decades. The single market has already brought sizable benefits for the European economy. 2 However, much remains to be done, in particular in some market services sectors. The extension and deepening of the internal market remains a priority as regards further financial market integration, the pursuit of effective  1  See the ECB Occasional Paper Series No 44 “Competition, productivity and prices in the euro area services sector”, by the Task Force of the Monetary Policy Committee of the ESCB, April 2006. 2  The European Commission recently estimated that the single market has brought about an increase of 2.75 million extra jobs and an extra increase in welfare of € per head in 2006, corresponding to a 2.15% increase of the EU’s GDP over the period 1992-2006 (See European Commission, “The single market: review of achievements”, November 2007). 2  BIS Review 31/2008  competition in the energy market, and the implementation of the Services Directive.

The growing role of services 3 in modern economies suggests that improvements in European living standards are likely to depend on a high degree of competition and on productivity improvements in the services sector. •  Let me now focus more specifically on financial integration, which is of key importance for the ECB. The process of European financial integration is gradually taking place and considerable progress has already been made. The degree of integration, however, varies across market segments, and integration is generally more advanced in those market segments which are closer to the single monetary policy. While the euro area banking markets for wholesale and capital market-related activities show clear signs of increasing integration since the introduction of the euro, the retail banking segment has remained more fragmented, leaving European consumers unable to take full advantage of the benefits of the EMU and the Single Market. 4  •  While there has been progress in the implementation of structural reforms in Europe, the catalyst role of EMU in improving Europe’s growth potential has not yet been fully exhausted. The lacklustre performance in many euro area countries is rooted not in deficiencies in the current institutional framework, but rather in some national governments’ lack of willingness to implement structural reforms. The reasons why politically motivated governments tend not to implement sufficient structural reforms are by now well known. Structural reforms typically have positive, long-term effects, which can be difficult to ascertain in advance, but often negative short-term effects that are relatively more visible to voters.