the euro area. finally, i shall argue that the unique institutional choice for the euro area brings many advantages and opportunities and thus, if properly handled and carefully further developed, is a very solid fundament for a substantially more dynamic long - term development of the euro area than most observers currently appear to expect. having the honour of speaking at the american chamber of commerce, i will – you will not be surprised – draw some comparisons with the united states of america. the first is that the euro area is an economically integrated and large economic block that, in many respects, is similar to the us. these two economies are the two largest economic areas in the world. in 1999, the euro area gdp ( including greece ) was equivalent to 16 % of world gdp, whereas the share of the united states was 22 %. in terms of population, the united states ( with 272 million inhabitants ) is slightly smaller than the euro area ( with 302 million inhabitants ). underlying institutional and political structures the euro is both a product and part of the process of european integration, which began already fifty years ago. this is a process that continues to evolve. the eurosystem, comprising the ecb and the national central banks of the euro area, operates within the broader underlying framework of the european union. in order to put this framework into perspective, allow me to draw a few simple comparisons with the us. beginning with the similarities, i should first point out that both the eu and the us benefit from having written constitutions or constitution - like treaties. for the us, this is the constitution issued by the philadelphia convention of 1787, while the eu's " constitution " is set out by the successive treaties which established first the european community and later the european union. both the us constitution and the eu treaty were entered into voluntarily and resulted in the closer union of the participating states. both serve to lay down the level at which powers are to be exercised and decisions taken. we must understand that the eu's underlying framework, like that of the us, is a product of its times. when the us constitution was drafted, the involvement of the state in economic matters was extremely limited. in fact it was not until over a century later that the us finally had a fully - fledged central bank, after earlier attempts to establish a national bank had ended in the fed's predecessors being dissolved. by contrast, the process of european integration began at a time when the power of the state in managing and intervening in the economy

the modern central bank clearly needs to broaden its focus and to analyse a much wider group of financial intermediaries than in the past. 6 moreover, with the growing importance of institutional investors, including pension funds, on pricing in financial markets central banks need to pay attention to certain risks emerging from these developments. in particular, an “ agency problem ” will inevitably exist in the behavioural pattern of institutional investors arising from the difficulty of perfectly aligning the incentives of savers and those of the delegated portfolio managers. this may create issues of moral hazard, which are often resolved by judging the performance of portfolio managers against certain benchmarks. this could in turn lead to herd behaviour among investment managers and potentially to misaligned financial market prices that may blur the content of the information retrieved by the central bank. for pension funds, in particular, the shortening of the time horizon associated with the progressive aging of society might create incentives for asset managers to be myopic. overall, while noting that the growing importance of pension funds is beneficial to the functioning of the financial system, it also provides new challenges for central bank analysis and operations. finally, in particular in view of the current juncture of financial market turmoil, i would like to stress the significance of a strong and stable pension fund sector for the stability of financial markets and the wider economy. summary let me now briefly conclude by summarising the main points of my intervention : several difficult challenges are faced by the euro area economy in general and the private pension funds sector more specifically : 1. the ageing population, where i see an greater need on the side of public authorities and private pension funds to foster conditions that encourage and are conducive to saving, particularly in countries with a strong ageing of the population. see, for example, the article on “ the role of banks in the monetary policy transmission ” in the august 2008 ecb monthly bulletin. see e. g. box 3 entitled “ the recent repricing of credit risk ” in the october 2007 ecb monthly bulletin. see rajan, r. ( 2005 ), “ has financial development made the world riskier? ”, nber working paper no. 11728. recent examples of monetary and financial analyses conducted at the ecb include box 1 entitled “ new estimates on holdings by sector for euro area m3 ” in the december 2007 monthly bulletin ; box 1 entitled “ recent developments in mfi longer - term financial liabilities ” in the july 2006 monthly bulletin