profits are also supporting business investment. moreover, there is scope for a recovery in euro area private consumption, in line with growth in real disposable income. any central scenario for future developments is surrounded by a good deal of uncertainty, which at present is particularly related to oil prices. if oil prices were to remain high, or even increase further, it could dampen the strength of the recovery, both inside and outside the euro area, even though the oil intensity of production has fallen significantly since the 1970s and 1980s. all in all, while the burden resulting from higher oil prices cannot be avoided, its medium - term impact should be of a more limited magnitude than in the past. obviously, for this outcome to materialise, all parties concerned must live up to their responsibilities. turning to consumer prices, the oil market developments have had a direct impact on the euro area hicp. following an annual rate of inflation of 1. 7 % in the first quarter of 2004, inflation reached 2. 3 % in the second quarter and remained at that level in july and august. according to eurostat ’ s flash estimate, annual hicp inflation seems to have fallen slightly in september, to 2. 2 %. higher energy prices may have been more than compensated by lower food prices, partly due to base effects resulting from last year ’ s strong increases in this sub - category. still, on the basis of current market expectations for oil prices, it appears unlikely that annual inflation rates will return to levels below 2 % in the remainder of this year. nevertheless, looking further ahead, the available information does not indicate that stronger underlying inflationary pressures are building up domestically. recent wage developments have remained moderate, and this trend should continue. on the basis of this assumption, and provided that there are no further significant shocks to prices, annual inflation rates should drop below 2 % in 2005. several upward risks to the outlook for price stability continue to exist. concerns again relate to oil price developments, in particular to the extent that second - round effects stemming from wage and price - setting behaviour materialise. it is therefore of the utmost importance to avoid inappropriate reactions, as observed in past episodes of strong oil price increases. a further upward risk relates to the future development of indirect taxes and administered prices. these upside risks call for ongoing vigilance, which is a necessary condition for keeping medium to long - term inflation expectations in line with our definition of price stability. as regards the monetary analysis, m3 growth remains res

would warn against a change to the text of the treaty or the regulations which form the basis of the pact. we consider the pact as key to ensuring macroeconomic stability on a sustainable basis. it is a framework which is necessary to preserve sound fiscal policies in the euro area, for which strict surveillance and effective peer pressure on national budget policies are indispensable. it is of vital importance to the credibility of the budgetary surveillance that the reliable compilation and timely reporting of government finance statistics is ensured. the european accounting rules must be fully respected when recording all types of expenditure and revenue. this should be done in a manner that is consistent and stable over time and homogeneous across countries. the procedures must not be vulnerable to political and electoral cycles, as stated by the ecofin council. countries should consider the quality and integrity of their statistics as a priority matter. finally, let me report on the detailed discussion we had today on employment and unemployment developments in the euro area. two observations stand out when we look at the period of relatively slow real gdp expansion since early 2001. first, after an initial rise, the euro area unemployment rate has remained broadly unchanged since early 2003. and second, there seems to have been a relatively limited negative impact on employment growth over the past few years. the following factors might help to explain this pattern. while the period of slow growth has been relatively long from a historical perspective, the cyclical amplitudes have been smaller and have not therefore triggered very sharp reactions of employment and unemployment. in addition, wage developments have been more favourable than in previous episodes, and firms may have - to a greater extent than previously adjusted labour input downwards in term of hours, rather than in terms of employees. this in turn might indicate that firms have gained an element of flexibility to adjust costs. looking forward, from a cyclical point of view, employment should recover and unemployment could start falling in the course of next year if overall demand develops as expected. this should support economic growth through an increase in labour income and a positive impact on consumer confidence, and thus on consumption. however, structural problems remain large. this is highlighted, for example, by the fact that over 40 % of all unemployed people in the euro area have been without a job for more than a year. in order to decisively overcome the obstacles towards more employment growth and to reduce the trend or structural level of unemployment, further comprehensive labour market reforms are of the essence.