at 2. 3 % on average in 2002, unchanged from 2001. inflation in 2002 was thus slightly above the upper limit of the ecb's definition of price stability and it turned out to be higher than expected at the end of 2001. in part, this was due to the fact that prices were pushed up in 2002 by a number of temporary or one - off factors, including higher oil prices, increases in indirect taxes and adverse weather conditions. on top of this, there have been some effects from the cash changeover, even though i should stress that the perceived impact of the euro cash changeover on inflation was much greater than the actual impact. of greater concern than the effects of these short - term factors on the medium - term outlook for price stability was that real wage growth remained relatively strong despite the weakening of economic activity and a rise in unemployment. this development pointed to persistent structural rigidities in the labour markets of the euro area. the assessment of the implications for price stability of monetary developments was less straightforward, particularly in the second half of 2002. the average annual growth rate of the broad monetary aggregate m3 increased to above 7 % in 2002, from around 5½ % in 2001, considerably exceeding the reference value of 4½ %. this development was in part the result of high volatility in financial markets, and largely reflected investors'preferences for short - term liquid and less risky financial assets. it also reflected the relatively low interest rates in the euro area in 2002. the strong monetary growth in the euro area has resulted in the creation of more liquidity than may be needed to finance sustainable non - inflationary growth over the long term. overall, however, in an environment of subdued economic activity and moderate credit growth, monetary developments in 2002 were not seen as pointing to risks to price stability. i should also like to recall that our assessment of risks to price stability changed gradually over the year. in the first few months, when economic activity accelerated, we regarded monetary developments, wage trends and the high persistence of service price inflation as possibly indicating upward risks to price stability in the medium term. later on, the appreciation of the euro, beginning in late spring started to dampen inflationary pressures. furthermore, an important factor shaping the monetary policy assessment at that time was that the economic outlook was still subject to uncertainty. in this environment, the governing council was of the view, in the first half of 2002, that the available information provided inconclusive signals as regards the balance of risks

is a pleasure to speak today at this conference marking the 20th anniversary of the european monetary institute ( emi ), and in particular to be part of this session that recognises and celebrates the contribution of alexandre lamfalussy. bis central bankers ’ speeches the discussion today has naturally focused on the emi, the euro and monetary policy, but i would like to take this opportunity to reflect on another issue which is vital for the single currency, and to which alexandre has made an immense contribution – that is, financial integration. financial integration and the single currency are in many ways two sides of the same coin. one fundamental reason for the single currency was to maximise the benefits of the single market for capital. and, conversely, it was understood when the euro was conceived that integrated financial markets would be necessary for an effective single currency. 1 alexandre ’ s experience in academia, the private sector and central banking put him in a unique position to contribute to this process. he contributed intellectually, for example through his leadership of the suerf2 network set up to promote discussion of financial and monetary issues among academics, central bankers and market participants. he contributed practically, not least as chairman of euro - mts, the european electronic fixed income market, late in his career. and he made significant policy contributions, from overseeing the creation of the target payment system at the emi to launching what became known as the “ lamfalussy process ” for supervisory and regulatory convergence in europe. for this reason, the ecb recognised and honoured his role by establishing about ten years ago a “ lamfalussy fellowship ” programme. it sponsors five young economists each year to conduct research on the integration, structure and performance of the european financial system. however, we know – and to our cost – that ultimately the euro area did not succeed in achieving sustainable financial integration. while financial integration deepened significantly after the euro was introduced, the global financial crisis caused that process to go into reverse. and we can see the importance of financial integration for the single currency all the more in its absence. in the periphery, financial fragmentation has led to high interest rates for firms and households, and disrupted monetary policy transmission. in the core, it has led to exceptionally low interest rates for savers and potentially distorted asset prices. consequently, the whole of the euro area would benefit from lasting financial reintegration – and indeed, addressing financial fragmentation has been one of the key tasks of euro area policy - makers, including the ecb, over the past