the essential ingredients of any sustained recovery. the private sector must take up the baton from the public sector in support of activity, and net external demand should play a predominant role. the success of the fiscal consolidation programme is a centrepiece of this strategy. correcting the budget deficit has become an unavoidable priority for spanish economic policy. the budget outturn data currently available suggest the targets set for 2010 will be met, at least as far as central government conduct is concerned. on this basis, it is therefore vital to design a budget for 2011 that is fully consistent with meeting the budget deficit target of 6 % of gdp for that year. to ensure no deviations arise, monitoring and surveillance procedures for the budget outturn must be reinforced and, should deviations be detected, corrective measures must be rapidly applied. the availability of contingency plans designed sufficiently in advance would contribute greatly to the success of these measures. the draft state budget details appropriately the revenue - and spending - side measures that should allow compliance with the state target set. in terms of its composition, moreover, the draft budget has most of the adjustment falling on public spending. and this, on past experience, raises the effectiveness of the consolidation strategy. yet the presence of risks threatening the attainment of these targets should not be understated. the budget is based on a macroeconomic scenario of significant recovery which, if not confirmed, might lead to a revenue path worse than projected. as i said, if this were the case, offsetting measures should immediately be applied. but perhaps the biggest risk to general government meeting its targets stems from the potential deviations that may arise at the regional and local government level. as known and reiterated on many occasions, the high decentralisation of public spending in spain means that the collaboration of the regional and local governments is essential for achieving budgetary stability. at the end of this year it will be possible to make a full assessment of the consolidation drive made by the regional budgets, but my impression is that, as matters stand today, the measures announced by most regional and local governments far from respond to the reduction in public spending needed. i therefore believe formulas must be sought to strengthen regional and local government commitment to budgetary stability and to encourage compliance. in this respect, we should not rule out a revision and strengthening of the national budgetary framework, in particular in the case of regional and local governments, a framework that resides essentially on the budgetary stability law. such action would be

##balancing has taken place, i expect wage growth to moderate, just like firms ’ profits. because, if real wage growth exceeds the economy ’ s growth potential for an extended period of time, firms would pass at least some of these cost increases on to consumers. and this, of course, could mean higher inflation. this would again prompt a response from the eurosystem. currently, we are expecting wage increases to have some effects on prices. but we do not see any evidence of a self - reinforcing spiral. [ 6 ] we will continue to carefully monitor whether the price and wage - setting behaviour will normalise and align more closely with our inflation target. otherwise – as you may have guessed by now – the eurosystem will be called to action. 4. 3 governments i would now like to turn my attention away from the firm - worker nexus and towards another important player : governments. how can fiscal policy make it easier for the central bank to maintain price stability? first, in the current environment of high inflation, fiscal policy needs to be restrictive. expansionary fiscal policy could spur aggregate demand and increase existing inflationary pressures. so i ’ m happy to see deficit ratios declining in the euro area. in many cases, this is related to the phase - out of the crisis response measures. i see the risk of an underlying expansionary trend gaining traction. second, public finances need to be sound. this is not only a timeless requirement, it is also a very topical one. countries need to rebuild fiscal buffers to prepare for future crises and future spending needs to cope with the climate transition, demographic challenges and rising geopolitical conflicts. fiscal rules are the key to ensuring sound public finances. in europe, these fiscal rules are defined in the stability and growth pact. unfortunately, the manner in which the pact was handled in the past was inadequate : it did not prevent high and rising debt ratios. the european commission ’ s recent reform proposal does not improve upon the status quo : [ 7 ] it offers a great deal of scope for interpretation and discretion. and this threatens to weaken the binding effect of the fiscal rules even further. i see two main areas for improvement : [ 8 ] first, the number of exemption clauses should be reduced significantly. because having too many loopholes risks watering down the consolidation targets. instead, we need concrete, non - negotiable minimum standards. second, the surveillance of government finances could be delegated to an independent institution, such