the medium term. very much the same line of argument applies to the euro area. euro area real gdp has been growing at a high rate for four consecutive quarters, including the second quarter of 2000. some monthly indicators which extend into, or cover, the third quarter of this year point to a possible moderation in growth rates. in particular, the pace of growth in industrial production appears to have declined somewhat and some survey data have also indicated that there has been a certain degree of moderation. however, survey data remain at high levels and should be underpinned further by positive factors such as high employment growth. there is thus good reason to remain confident that strong growth will be sustained in the euro area. this picture is broadly supported by bond yields in the euro area. these have changed little over recent weeks. they continue to be compatible with market expectations of strong economic growth in the euro area in the medium term and with developments in consumer price inflation, which are in line with the ecb ’ s definition of price stability. we trust that this assessment will also increasingly be reflected in exchange rates. these have clearly lost touch with economic fundamentals and this is posing risks to the world economy. for the euro area in particular the continued undervaluation of the euro vis - a - vis other major currencies is putting upward pressure on import prices. we shall, therefore, monitor exchange rate developments closely. as regards developments in consumer prices, no additional euro area - wide data on the harmonised index of consumer prices ( hicp ) have become available since our last meeting. in september 2000 inflation rose to 2. 8 %, mainly as a result of higher energy prices. as i mentioned earlier, inflation rates may remain above 2 % for longer than was expected just a few months ago, owing to unexpected developments in energy prices and the past decline in the euro. in order to maintain price stability over the medium term it is important that economic agents accurately perceive the nature of current price developments. in particular, it needs to be recognised that current upward pressures can be successfully overcome if economic agents see them for what they are - namely, one - off or temporary price increases resulting from external factors - and act accordingly. these factors must not give rise to second - round effects. if oil prices do not rise further, as the markets expect, the effects of past oil price increases will gradually drop out of the annual inflation rate. at the current juncture two main considerations should guide expectations regarding the outlook for

, they are sufficient to smooth the cycle. a recent study demonstrates that 47 % of an unemployment shock is absorbed by the automatic stabilisers in the eu, compared with only 34 % in the us. 4 they were insufficient in some countries during the crisis only because they faced an exceptional circumstance : a very large shock from the financial sector. with a genuine banking union, however, the risk of this happening again should be lower. first, we expect the ssm to increase the quality of supervision and the assessment of systemic risk. second, if a financial shock were still to appear, national budgets should be better insulated. the costs of banking sector repair would be shared with the private sector through the single resolution mechanism and a more integrated european financial market. all this suggests that stabilisation at the national level could be more effective in future. or put differently, the more successful we are in building a genuine banking union, the less we would need a central budget for stabilisation purposes. however, this does not mean i see no role for fiscal union in the stabilisation area. first, we would need the public backstop, namely for the future resolution fund, which would be fiscally neutral over the medium - term. in my view the esm could play this role like the us treasury does this for the federal deposit insurance corporation by providing a credit line. since there has been some confusion in the past, i would like to reiterate that this would indeed require a change of the esm treaty but not of the eu treaty. second, we would need an insurance mechanism against tail events that may still arise and endanger euro area financial stability. here we already have the esm to act as lender of last resort to sovereigns. to sum up : a functioning banking union reduces the need for the stabilisation function of a fiscal union, but not to zero. conclusion i have tried to give you the ecb ’ s view on the various aspects of the banking union. our preparations to take over the task of the ssm are well under way. we are adamantly a recent study demonstrates that automatic stabilisers absorb 38 % of a proportional income shock in the eu, compared with 32 % in the us. in the case of an unemployment shock 47 % of the shock is absorbed in the eu, compared with 34 % in the us. this cushioning of disposable income leads to a demand stabilisation of up to 30 % in