Flexible labour market structures and decentralised wage-setting are generally regarded as the prerequisite to support smaller enterprises, for these are often the engines of innovation in post-industrial economies. Last but not least, we should not underestimate the role of policy-makers in developing education systems. Let me add a word on this last point. We are often told that Europe and Western countries in general need more engineers and mathematicians to restore their supposedly lost competitive edge. Engineers are definitely essential as creators yet the success of a company or a society requires more. To be truly competitive a firm also needs excellent management and marketing skills. In short, you need an entrepreneur. However, it is often overlooked when it comes to the educational reform in Europe. Young people should be taught the essentials of ethical entrepreneurship and finance from the very first grades onwards. When creating and producing something innovative you cannot just stop half way – you also have to sell it. Thirdly, talking about competitiveness, we should not underestimate the role of universities and higher education either. Money is again an issue here. We should be much more open to finding additional sources of financing. As we know, in the United States the success of universities relies on relatively broad-based funding. We also know that European education systems are already facing tensions in light of the traditional role of a state. In my opinion, policy-makers should promote new and innovative ways of funding higher education which would be clearly beneficial for all parties.

The economy needed a new nominal anchor in order to return to a disinflation path. Inflation targeting was chosen as “the best of all bad” alternatives at the time. Such a sudden switch from a fixed exchange rate system to inflation targeting required a radical and fast change in the central bank’s mentality. This was perhaps the biggest challenge that the CNB had to face. Over the past five years it has involved much work on improving our forecasting tools, leading to substantial development in our internal analytical processes. At the beginning of 2002, the CNB settled on a new forecasting process. This integrates expert judgment and short-term analyses – which were the key pillars of the CNB’s forecasting tool-kit in the first years of inflation targeting – with a macroeconomic model that provides a consistent framework for the policy analysis. An important element of this step was a switch from a forecast with a fixed-interest-rate assumption to an unconditional forecast that includes a reaction function of the central bank. The initially established quarterly projection model was a small-scale model belonging to the second generation of such models. It was thus relatively simple and arguably missed many important links in the economy. Nevertheless, it was already quite close to the state-of-theart among the inflation-targeting central banks around the world, and intense work has been in progress to build a higher-generation model. As a result from July 2008 the CNB’s forecast is based on latest generation general equilibrium model, which is fully based on micro specifications.