contribution to growth from demographic factors has been observed since 1990. this reflects of both a decline in population growth and the ageing of the population. over this same period, the contribution from labour productivity growth has also decreased gradually. as a result, real gdp growth has fallen from 3. 6 % to 2. 0 %. demographic factors contributed 0. 3 percentage point to this decline. future demographic trends in the euro area are likely to be driven by lower fertility rates and rising life expectancy. available projections suggest that the population of the euro area will start to shrink in absolute terms after 2020, and that one out of three will be older than 65. simulations of the impact of demographic projections on real gdp and real gdp per capita growth do not offer a reassuring picture. 1 under the assumption of a ) unchanged labour productivity growth rates, of b ) an unchanged percentage of people of working age in employment, and of c ) an unchanged number of average weekly hours worked, the projected demographic trends imply a decline in average real gdp growth between 2020 and 2050 to 1 %. importantly, the deterioration in gdp growth per capita would also be noticeable. one could argue that demographic projections are highly unreliable. one could also argue that the adverse demographic developments on growth could be offset by increasing the average number of hours worked and the percentage of people of working age in employment, and also by raising the retirement age. however, individual measures for raising labour utilisation face natural limits. therefore, the inevitable implication of such demographic developments is that the key to a prosperous future lies in raising labour productivity growth. indeed, without higher productivity growth, the euro area is destined to see its growth potential remaining low or declining significantly over the next few decades. allow me next to briefly review a few known facts about labour productivity developments in the euro area in recent decades. labour productivity developments in the euro area labour productivity growth in the euro area has been declining since the early 1960s. this slowdown in labour productivity mainly reflects less innovation and other efficiency gains ( as proxied by the concept of total factor productivity, tfp ). over more recent decades, lower growth in capital used per unit of labour has also contributed to the decline. however, the reduction in the growth rate of capital deepening can probably be seen as the flip side of the employment - rich growth which the euro area has experienced over recent years. this reflects an environment of wage moderation and progress with labour market reforms which may have partly reversed the earlier trend

higher average inflation has a negative impact on growth and welfare, while higher inflation volatility has a negative impact on welfare and, most likely, a negative effect on growth. 10 maintaining price stability is the best contribution the ecb can make to promoting growth in the euro area. conclusions let me conclude by saying that europe is reforming its economy so as to adapt to the challenges of globalisation, technological change and ageing. considerable progress has been achieved, as reflected in the significant rise in employment growth. monetary union has been effective – and very successful – in supporting growth through a credible monetary policy which creates a stable macroeconomic environment. it has lowered financing costs for a number of euro area countries by reducing risk premia. the challenge now is to raise the level of productivity growth in all euro area countries. i am very grateful to the banque de france and the conference board for joining forces with us to convene this conference. we share a common interest in learning more about the mechanisms that promote the creation of economic and corporate wealth in europe, and we all hope to learn a lot from this event. i wish you all a fruitful discussion. see p. aghion, r. blundell, r. griffith, p. howitt and s. prantl : “ the effects of entry on incumbent innovation and productivity ”, nber working paper no 12027, february 2006. see also p. aghion, n. bloom, r. blundell, r. griffith and p. howitt : “ competition and innovation : an inverted - u relationship ”, quarterly journal of economics, may 2005. see camba - mendez, g. ; j. a. garcia and d. rodriguez - palenzuela ( 2003 ) : " relevant economic issues concerning the optimal rate of inflation ". in o. issing ( ed. ) background studies for the ecb's evaluation of its monetary policy strategy, european central bank, frankfurt am main, 2003.