Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted. As regards fiscal policy, there is growing confirmation that the favourable cyclical developments led to better than expected budgetary outcomes in 2006 in a number of countries and in the euro area as a whole. However, updated stability programmes foresee only moderate progress with fiscal consolidation in the coming years. In this respect, some countries’ consolidation targets appear not  2  BIS Review 23/2007  fully in line with the requirements of the revised Stability and Growth Pact. Risks stem in particular from a lack of well-specified and credible measures, notably on the expenditure side of budgets. Given the favourable economic environment, the Governing Council considers it essential that procyclical policies are avoided in all euro area countries and that sufficiently ambitious fiscal consolidation efforts are made in the countries with remaining budgetary imbalances and/or high public debt outstanding. The opportunity should be seized to attain sound public finances within the programme horizons and by 2010 at the latest in all euro area countries. Fiscal consolidation that is part of a medium-term-oriented, credible and expenditure-based reform strategy would support longerterm output and employment growth and help prepare for the fiscal impact of population ageing. As regards structural reforms, the European Council will discuss the current state of, and future progress in, the implementation of the Lisbon strategy at its meeting which starts today.

Turning first to the economic analysis, according to Eurostat’s first estimate, the quarter-on-quarter growth rate of real GDP in the euro area for the fourth quarter of 2006 was 0.9%, which was above previous expectations. Our current assessment is that the quarterly profile of real GDP growth is likely to be somewhat smoother in response to the impact of indirect tax changes in one large euro area country than had originally been anticipated. The strength of real GDP growth in the fourth quarter is thus indicative of ongoing robust growth in the euro area. Both domestic demand and exports made significant contributions to real GDP growth, confirming the sustained and broad-based nature of the current expansion. The information on economic activity from various confidence surveys and indicator-based estimates supports the assessment that robust economic growth has continued into 2007. Looking ahead, the medium-term outlook for economic activity remains favourable. The conditions are in place for the euro area economy to grow solidly. As regards the external environment, global economic growth has become more balanced across regions and, while moderating somewhat, remains robust, supported in part by lower oil prices. External conditions thus provide support for euro area exports. Domestic demand in the euro area is also expected to maintain its relatively strong momentum. Investment should remain dynamic, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong corporate earnings, and gains in business efficiency.