and perceived inflation started to diverge after the introduction of the euro. while this is a feature which should not be ignored, since what consumers decide to spend depends on their perceived real income, it is now important to acknowledge that it was a temporary phenomenon, and that during the last year and half the gap between actual and perceived inflation has narrowed significantly. notwithstanding the many adverse shocks that hit the euro area in the past years, price stability has prevailed in the euro area. the success of the single currency in delivering price stability and stabilizing inflation expectations in the euro area can be explained by the european institutional framework and the principles followed by the european central bank. first, the european central bank is independent and has a clearly defined mandate given by the treaty to pursue price stability. second, the ecb has provided and made public an arithmetical definition of price stability corresponding to inflation rates below and close to 2 %. third, the medium - term orientation and the very nature of our concept of monetary policy contributes to a solid anchoring of medium and long term inflation expectations, in line with our definition of price stability. the best contribution that monetary policy can provide to economic growth is to maintain price stability. price stability ensures the transparency of the relative price mechanism, thus enhancing the efficiency of resource allocation. stable and low inflation supports private consumption via its positive impact on the real value of households ’ income and wealth. price stability reduces the borrowing costs for individuals and firms. as we all know, inflation erodes the purchasing power of the nominal return on long - term loan contracts or bonds. in case of high and uncertain inflation, savers or those who lend their liquid funds would require a higher rate of return from borrowers, in order to compensate for the higher risks related to the uncertainty about future inflation. this inflation risk premium implies that in an economy with high inflation, less investment projects will be profitable. in such circumstances, capital accumulation will be lower than it could have been in a situation of price stability and the potential output growth rate is consequently reduced. the challenge of economic growth let me now turn to some issues which still need to be addressed. the economic and monetary union has secured macroeconomic stability, has promoted financial integration and led to convergence of inflation and interest rates to low levels. the key question that naturally arises is the following : why has economic growth, nonetheless, remained subdued? in my introduction i have already hinted at my answer by referring to the need for completing structural reforms. let me now

certainly worked against the efforts of italian enterprises to increase their size and to improve competitiveness by renewing their products and reallocating resources towards new, more dynamic sectors3 [ see chart 4 ]. the lack of innovation might be partially related to the small - size of firms, which continues to be a predominant feature of the italian industrial system. in that regard the business environment continues to create obstacles to firm - size expansion and to the entry of new and more efficient firms, thus hampering productivity growth. the costs of opening and closing a business as well as the time required to complete the legal processes involved in enforcing contracts remains well - above the euro area average4 [ see table 3 ]. these considerations bring me to my third and final point : structural rigidities have slowed european firms ’ responses to structural changes in the production process. as a result, and in contrast to more flexible economies in the international sphere, many economies in europe have not fully reaped the benefits of the technological advances of the last ten to fifteen years. many european countries have not adapted their economic, social and legal frameworks in order to face the new challenges triggered by a rapidly transforming world economy. banca d ’ italia ( 2004 ), “ relazione del governatore sull ‘ esercizio 2003 ”, roma, may 2004. banca d ’ italia ( 2005 ), “ bollettino economico ”, n. 44, march 2005. pierluigi ciocca, ( 2003 ), “ the italian economy : a problem of growth ”, banca d ’ italia, economic bulletin, 37, 145 - 158, november. istat ( 2004 ), “ rapporto annuale : la situazione del paese nel 2003 ”, istat, roma, may. tommaso padoa - schioppa ( 2001 ), “ la competitivita dell ’ italia ”, speech held at the congress on small - sized enterprises, parma, 17 march. world bank ( 2004 ), doing business indicators. a sense of urgency to implement structural reforms was transmitted to european policy - makers last february when the european commission proposed a “ partnership for growth and jobs ” 5 as the core of a renewed lisbon strategy, by putting forward a program of priority actions. these priority actions can be summarized under three key headings : ( 1 ) to extend and deepen the single market ; ( 2 ) to build better infrastructure, motivate