the business lines and the applications upon which businesses rely. operating systems and the equipment on which business applications run also are reliant on microchip - embedded logic affected by two - digit year representations. unlike business applications where the dates usually are visible, potential problems in operating systems and equipment usually are invisible or embedded in programs. that means that banks and other institutions must rely on vendors, rather than their in - house technical staff, to identify and fix the problems. similarly, mechanical devices used in security systems, elevators, and heating and cooling equipment controlled by microchips can be affected and may even cease to run. making sure that all of our business applications work together properly will be a formidable challenge, both internally and across the financial services industries. for a variety of business and economic reasons, different approaches to correcting year 2000 problems will be taken by different organizations. even within organizations, corrective approaches may well vary for different business applications. because the changes necessary to fix applications to make them year 2000 - compliant will be completed at different times, testing and re - testing will be needed to assure that information flows properly. continual testing, however, will consume a very significant amount of resources, usually drawn from business line areas. consultants estimate that testing alone will absorb as much as 70 percent of year 2000 project resources at some institutions. the year 2000 issue stretches well beyond the doors of financial services companies. your customers and counterparties also must cope. how well they handle this complex and costly technical challenge could affect their business prospects and even their viability. consequently, over the next couple of years, underwriting standards should specially consider how customers are addressing the issue, and credit officers should monitor the progress of customers who rely on technology on a regular basis. in my bank ’ s and the basle supervisors ’ work with the industry to meet the year 2000 challenge, a number of issues have arisen that are worth calling to your attention. probably the most significant issue is the relationship that banks have with third - party vendors and service providers. not infrequently, we have found that banks have assumed either that vendors will make their products and services year 2000 - compliant, or have sought only general assurances from the vendors, which have been accepted at face value. either approach puts a bank at significant risk. in addition, we uncovered instances when products represented by vendors as compliant simply were not. more significantly, we found that even if a vendor has made appropriate modifications and tested a product

monetary developments continue to be fostered by portfolio shifts, reflecting a sustained preference on the part of investors for liquid and secure assets in an environment of high uncertainty. however, the low level of interest rates has also contributed to strong monetary growth. when interpreting monetary trends, particular account needs to be taken of the portfolio shifts towards increased demand for monetary assets for precautionary reasons. the reduction in geopolitical tensions should support an unwinding of these portfolio shifts. a reversal in monetary trends would in any case dampen the concerns regarding the medium to long - term implications of recent monetary dynamics. as a consequence, monetary developments will continue to be monitored closely. overall, it currently appears that inflation rates should decline to below 2 % over the medium term, in particular given the outlook for economic activity and the significant appreciation of the euro. it also appears that the strong expansion of m3 should not adversely affect this outlook, as portfolio shifts have played a prominent role ; in particular, the build up of liquidity should not translate into inflationary pressure as long as economic growth remains modest. hence, cross - checking the information from the two pillars leads us to conclude that the risks to price stability over the medium term remain limited. regarding fiscal policy, developments in 2002 were generally not satisfactory. in particular, countries that had not achieved sound fiscal positions in earlier years when the economic conditions were more favourable are now struggling to keep their budgets under control. looking ahead, it is crucial to underpin the fiscal policy framework with decisive action, strong peer pressure and consistent implementation of the rules of the treaty and of the stability and growth pact. countries should maintain budgetary positions close to balance or in surplus over the cycle, and, where this is not yet the case, take the required structural consolidation measures. this also creates the necessary room for the operation of automatic stabilisers. at the same time, governments are advised to place the emphasis on growth - oriented consolidation policies that strengthen the productive forces of the economy. by strengthening confidence, a credible medium - term fiscal consolidation strategy will also support economic growth in the short term. finally, structural reforms are essential to increase the euro area ’ s growth potential and enhance its ability to better withstand external shocks. indeed, such reforms, which should aim to reduce rigidities in labour and goods markets, could significantly strengthen the degree of resilience of economic activity to such shocks, both in the euro area as a whole and in its regions. renewed momentum in the process