mr. duisenberg reports on the outcome of the second meeting of the governing council of the european central bank introductory statement by the president of the european central bank, dr. w. duisenberg, at the press conference held in frankfurt on 8 / 7 / 98. the governing council first assessed current economic developments in the euro area. the general picture is one of continued economic expansion combined with broadly low inflation. several forecasts made during spring 1998 have even suggested slightly lower rates of inflation for 1998 - 99 compared with expectations in autumn 1997. as far as price developments are concerned, inflation as measured by the harmonised consumer price index ( hicp ) is estimated to have risen slightly in april, to 1. 4 %, but has not increased further in may. output growth has remained strong in recent quarters, with annual growth rates close to or even exceeding 3 %. economic growth has been driven increasingly by domestic demand rather than net exports, as might be expected at this stage of the cycle. private consumption and stockbuilding have been the main factors underlying domestic demand to date. the favourable conjunctural situation has started to feed through into the labour market, although improvements here have in some countries been too slow to appear. it is evident, however, that economic growth alone will not reduce the urgency to proceed with structural adjustments in order to tackle unacceptably high rates of unemployment. as regards monetary and financial developments in the euro area, the annual growth rate of the broad money supply ( m3h ) accelerated in april to around 6 % from 5. 5 % in march. the growth rate of m1, the narrow money supply, also picked up, to around 10 %. we shall monitor these developments very carefully. in principle, the economic performance i have just described provides a favourable environment for continued fiscal consolidation. it is with some concern that we observe that in a number of member countries the prospects for this to actually develop seem to be, to put it mildly, rather subdued. in this respect, i should like to underline three aspects. first, any “ growth dividend ” resulting from the current cyclical upturn should be used to bring deficit and debt levels down, rather than relaxing control over expenditure. second, most member states need to go a step further, and indeed improve structural balances as they are not yet in compliance with the obligations under the stability and growth pact. this implies that the benchmark for fiscal policy must now be a budget close to balance or in

usefully perform, the governing council attaches particularly high importance to its contributions to the stabilisation of money market interest rates and to the enlargement of the demand for central bank money by creating or enlarging a structural liquidity shortage in the market. in the light of the potential burden which a minimum reserve system could impose on the private sector and the effects it might have on the financial activity of credit institutions in the euro area, the governing council has decided on features which fulfil the two money market management purposes outlined above, while at the same time allowing an adequate remuneration of minimum reserves. a number of details of the minimum reserve system that will be applied were already specified in previous documents published by the european monetary institute. additional features agreed upon yesterday include the liability base, the lump - sum allowance and the rate of remuneration. with regard to the latter, the ecb will remunerate minimum reserve holdings at a level corresponding to the rate of its main refinancing operations. the governing council intends to decide on the exact specification of the minimum reserve system in november 1998 at the latest. this decision, in particular as regards the reserve ratio ( which is currently defined within a range of 1. 5 % - 2. 5 % ), will be based on the early data from the new system for money and banking statistics. further details are provided in the separate press release that is being issued to you this morning. it is intended that the precise features of the minimum reserve system will be published in the form of an eu council regulation. for this purpose, the governing council adopted an ecb recommendation for an eu council regulation on the application of minimum reserves by the european central bank. in accordance with the provisions of the statute of the escb, the eu council, acting by a qualified majority and after consulting the european parliament and the commission, is expected to adopt this regulation. the governing council also adopted ecb recommendations for eu council regulations concerning the collection of statistical information by the ecb and concerning the powers of the ecb to impose sanctions. all three ecb recommendations will be published in the official journal of the european communities for general notice. ( b ) foreign exchange issues the governing council decided on the size and form of the initial transfer of foreign reserve assets to the european central bank from the national central banks participating in the euro area. this transfer is to take place on the first day of 1999. it has been decided that the initial transfer will be