##ifies their high pay. the fact that hong kong appears to be, overall, a rather expensive place, relative to the majority of neighbouring economies, is a consequence and symptom of its success. as anyone can see by just looking around, this doesn't mean that we can no longer win any business. but we can only afford to pay ourselves what we are worth. if costs go too high and hong kong suffers an absolute loss of competitiveness ( as opposed to there merely being shifts in relativities between sectors ), then an adjustment process kicks in to restore competitiveness. since we have a fixed exchange rate, this adjustment occurs through downward pressure on domestic costs and prices. we have seen this process very clearly and effectively at work over the past three years or so ; for instance, the loss of competitiveness inflicted on hong kong by the currency depreciations elsewhere in the region in 1997 was made good largely through internal deflation within the space of about 18 months. at risk of my labouring the point, look at cities such as london, paris, zurich, tokyo and new york. in absolute terms they are expensive places, but they all generally thrive. the citizens don't hang their heads in shame at being in a high cost and high earning environment. indeed, many relish it. but none of the businesses there can afford not to search continuously for greater control of costs, for higher productivity, for new products and markets, and so on. competitive pressure may be intensified by globalisation and by the emergence of significant competition even from third world cities, where basic costs are hugely lower, but the very survival of the wealthy cities has not been seen to be seriously threatened on that score. over a period of time there may be marked shifts in relative income levels between different locations – hopefully as the living conditions of the poor advance more rapidly than those of the rich, although sadly there has been less evidence of that than one might have wished for – but there is no reason to expect the great cities of the world to sink out of sight. and if you add hong kong to that list, you will see the point i am trying to make. i'm not sure whether anyone a quarter of a century ago accurately predicted how important a contribution the financial and business services sectors would now be making to the hong kong economy. looking ahead, i am definitely reluctant myself to make any prediction about the mix of activity twenty - five years from now. ask anyone involved in

conditions that italy must take advantage of to introduce further structural reforms, which are necessary to relaunch business activity and create more and better job opportunities, particularly for young people. reforms tend to bear fruit only after some time ; the more comprehensive is the project and the clearer the objective, the sooner we can make an impact on confidence and expectations. our goal must be to lead firms and the economy as a whole back onto a path of sound and steady growth in productivity ; innovation and investment must benefit from a nurturing and rewarding environment. the financial system still faces enormous challenges. efforts to strengthen it must continue. backed by tangible progress on the european front, creating a more open capital market that will welcome firms which today do not issue shares and bonds is an objective we cannot overlook. financial intermediaries must become more efficient, more profitable and venture into new areas of operation and so become more stable and safe. the authorities must be pragmatic in seeking to adapt their tools to safeguard stability. the italian banks have clearly suffered from the crisis ; as national and european supervisory authority we now have to handle delicate and difficult situations. we are doing so in an environment that has undergone profound and rapid changes, cooperating actively with all the institutions and authorities concerned. the volume of non - performing loans is large and earning capacity is low. and yet there is widespread determination to overcome the difficulties and once again serve the economy with profit. the measures taken to deal with bad debts, now and in the future, are important ; our assessment of the first steps made in this direction is positive ; the work must continue with courage and farsightedness. the bank of italy, as well as the government and the banks, will ensure that these measures are as effective as possible on both the technical and regulatory level. to minimize the risk of bank crises, however, we need swift action, structural change, farreaching organizational reform and constant monitoring of the quality of senior management. major reform measures have been introduced in the last twelve months or so concerning the role of banking foundations and the structure of the cooperative banks and mutual banks. in some cases, pre - existing weaknesses have led to extremely adverse results. opportunities have now arisen that must be grasped without delay. the process is not an easy one, as recent events have demonstrated. bis central bankers ’ speeches the new european crisis resolution procedures stem from justifiable concerns about how opportunism and favouritism can weigh, including financially, on the