nature. the first naturally concerns the international environment. forecasts for world growth remain good. at this juncture, the us economy appears to be absorbing the economic and financial impact of the slowdown in the property market. emerging market economies displayed encouraging resilience in the face of the two episodes of financial volatility that affected international equity markets in may 2006 and march 2007. nevertheless, several risks should be highlighted : that of a sudden drop in us consumption in the wake of the problems in the property market ; that of a sharp increase in commodity prices ; that of a return to volatility on financial markets, after several exceptionally calm years ; and, linked to the latter, that of a disorderly adjustment of exchange rates triggered by the build - up of international imbalances. the second concern relates to the extremely rapid growth of monetary and credit aggregates in the euro area. the annual growth rate of m3, which was below 6 % in 2004, gradually accelerated and currently exceeds 10 %. loans to the private sector also continue to expand by more than 10 %. structural changes in money and credit demand – linked to financial innovation – may partly account for this acceleration. however, these developments must be closely monitored in view of their implications for monetary stability and that of financial systems. during 2004 and 2005, household borrowing was the primary source of credit growth ; in 2006, this was replaced by lending to enterprises, in line with the economic recovery and the rise in – often highly leveraged – company buyouts. the strong profits and financial soundness of firms facilitate and sometimes encourage increased borrowing, which is then presented as “ optimising ” their liability structure. but balance sheets are weakening and difficulties could appear in the event of a turnaround in the business cycle. the third question concerns the acceleration of productivity observed in the euro area since mid - 2005 : is it purely cyclical or does it reflect a more permanent and structural improvement? over such a short period, caution would favour the first answer. nonetheless, the conjunction of strong employment growth and a rapid rise in productivity is highly unusual. it constitutes a reversal of the previous trend in europe since, for over a decade, periods in which there has been an improvement in employment have also seen a slowdown in productivity. in general, workers that have just entered the job market are initially less productive than more experienced employees. this effect now appears to be offset by other more favourable and fundamental factors. the structural reforms implemented in the last few years

christian noyer : monetary policy, the french economy and its outlook introductory letter by mr christian noyer, governor of the bank of france, to the bank of france ’ s annual report 2006, submitted to the president of the french republic, the president of the senate, and the president of the national assembly, 1 august 2007. * * * i have the honour of submitting to you, as required by law, the report on the operations of the banque de france, monetary policy and its outlook. the year 2006 was marked by robust and more balanced growth in global economic activity across virtually all regions. thanks to this favourable international environment, the french economy saw a return to dynamic growth conducive to employment and the reduction of government deficits. this cyclical upturn should not, however, mask the structural difficulties facing the french economy, which is performing less well in all these areas than its main trading partners and which, moreover, is witnessing a further widening of its external deficit. against this backdrop, i should like to outline a number of analyses of the growth environment, monetary policy, the state of the french economy and the main challenges that it needs to rise to in order to take advantage of globalisation and make structural improvements to growth and employment. in 2006, the european economy entered a period of sustained and balanced growth growth in the euro area is sustained : after 2. 9 % in 2006, it could stand at 2. 6 % in 2007. such a performance – growth above 2 % for two consecutive years – has not been observed since 1999 - 2000. in 2006 alone, over two million jobs were created in the euro area, which brings to 13 million the total number of jobs created since the introduction of the single currency ; this figure is slightly higher than that for the united states over the same period. after a catch - up phase in which growth was significantly above its long - term trend, the euro area ’ s gdp is currently increasing at a rate close to the economy ’ s potential. this growth is balanced since all of the components of demand are contributing to it in a harmonious fashion. in the first phases of recovery, the contribution of external demand was decisive. but productive investment and, almost everywhere, household consumption are now supporting the business cycle. this has enabled and led, in most countries, to a welcome consolidation of public finances, with no adverse impact on the economy. concerning the future, the outlook for europe is dominated by three questions, varied in