is severely affecting consumption, is prompting an adjustment in prices and margins that is beginning to impact services and the other less volatile components. and this means that the price growth differential with the euro area has turned negative, and will foreseeably remain so in the coming months. the cpi is expected to continue to temporarily post negative rates of change in the coming months and, once the statistical effect linked to higher oil prices in the first half of 2008 is stripped out, inflation should resume positive although very moderate rates of change. this price behaviour is in line with the improvements in competitiveness required to lessen the scope and costs of the recession, to prompt the necessary adjustments and to embark on a sound recovery. the outlook for the spanish economy points to declines in gdp over the rest of the year that should lead to a significant fall in 2009, albeit slightly lower than is forecast for other european countries. it is highly likely that the worst of the contraction has already passed, and that the intensity of the restrictive impulses will begin to diminish in the second half of the year as the broad range of measures implemented progressively deploy their effects. as a result, the fall in activity in 2010 is expected to be less pronounced. the course of employment in this scenario, in any event, is a cause for concern ; despite the somewhat more positive signals given by some recent indicators, linked in part to seasonal factors, job destruction may run for some time and the unemployment rate may continue further on its rising trend. the imbalances built up during the long expansionary phase, in the form of the inflation differential and the resort to external financing, are being swiftly reabsorbed, providing an unquestionable source of relief in the global outlook described. yet this rapid correction is occurring on the back of an excessive brake on activity, entailing major costs in terms of job destruction, higher unemployment and the deterioration of the productive fabric. if the institutional features behind these developments are not reformed, there is a risk that, even after the most acute phase of the crisis is over, they will continue to hold back the spanish economy ’ s possibilities of recovery and become a drag on further progress in real convergence with europe. to rebuild sound foundations for growth, economic policy should contribute to setting in place the appropriate conditions to revive confidence, to return financing flows to normal and to reinvigorate spending plans. that will require headway in restoring health to the financial position of the private sector and the banking system,

. in our experience, we have found that operating this way around our inflation target is an effective way to anchor inflation expectations. indeed, in recent years, inflation expectations have become firmly anchored on the 2 per cent target. this is important for the economy. with inflation expectations solidly anchored, investors can better assess the future value of their investments. savers can be more confident that their purchasing power will not be eroded unexpectedly by inflation. similarly, debtors can better assess the real burden of their interest payments. wage bargaining can become less contentious so labour disruptions decrease. the duration of wage and financial contracts can be lengthened considerably. all of this is possible because people are confident that inflation will neither greatly exceed, nor greatly fall below, 2 per cent over the medium term. in short, the real economy works better and is more stable. moreover, the credibility of the targets has changed the whole dynamic of the inflation process. sudden temporary swings in energy prices, or movements in the exchange rate, do not feed into other prices in the economy the way they did in the past. again, this is because inflation expectations are well anchored. i should be clear that adopting the inflation targets was not the only thing that happened in the past 10 years to improve canada's economy. the federal government, and the provinces, proceeded to clean up their balance sheets. because of that, our public debt - to - gdp ratio is on a sustainable downward path, even during a period of economic slowdown. this improvement in the public sector balance sheet has led to a sharp increase in national savings. as a result, our net foreign indebtedness fell from a peak of 44 per cent of gdp in 1993 to about 20 per cent today. it is important that we continue to reduce our net foreign debt. in canada, it is particularly important that we do this before the baby - boom generation retires. so, based on our experience, i can say that a monetary policy aimed at low, stable, and predictable inflation and a fiscal policy aimed at reducing the public debt - to - gdp ratio work well together. prudent monetary and fiscal policies reinforce each other's credibility. the role of a flexible exchange rate let me now turn briefly to the role of exchange rates. this is one area where our two countries have made different choices. france is one of a dozen european countries that have chosen a monetary union with a single currency. this remarkable effort reached a crucial milestone at the start of this