for maintaining price stability. the maastricht treaty also states that the eurosystem shall support the general economic policies in the community without prejudice to the objective of price stability. there is a widely held view that maintaining price stability is the best contribution monetary policy can make to a high level of output and employment in the medium term. with regard to fiscal policy, in 1997 the stability and growth pact was agreed among the governments of the eu. this pact requires fiscal authorities to meet the medium - term budgetary objective of positions close to balance or in surplus. it thereby provides the right incentives for the conduct of sound and disciplined fiscal policies across all participating member states. safeguarding sound government finances is a means of strengthening the conditions for price stability and achieving strong sustainable growth, which is conducive to employment creation. in addition, structural reforms in labour and goods markets are the best way to address the underlying causes of the currently high level of unemployment in europe, in particular the structural rigidities in the labour market. this clear division of responsibilities enhances the credibility of monetary and economic policies in europe, increases transparency and facilitates accountability. at the same time, it requires national policies and labour and goods markets to be increasingly flexible in order to be able to respond effectively to economic shocks. well - functioning labour and product markets are needed to enable adjustments to be made to wages and prices if local or global economic conditions change. against this background, an open exchange of information among policy - makers is most helpful for a proper assessment of the impact that fiscal policies have on developments in the euro area as a whole. this assessment will form one input – among others – into monetary policy decisions aimed at maintaining price stability over the medium term. the eurosystem ’ s monetary policy strategy given the well known lags in the monetary policy transmission mechanism, it is important that monetary policy is conducted in a forward - looking manner with a clear focus on the medium term. transitory factors that are not under the control of a central bank, such as sudden oil price shocks or changes in indirect taxes, may influence prices in the short term. to the extent that such factors represent one - off changes in the price level, these effects cancel out if a longer time horizon for the stabilisation of prices is chosen. the eurosystem, like any other central bank, influences future inflation by adjusting short - term interest rates. in the transmission of monetary impulses to the real sector, the behaviour of financial institutions, corporations

euro. clearly, the introduction of the euro has had important implications for international capital markets. this has been the case not only because a number of the currencies which have now been replaced by the euro played an important international role in the past, but also because the euro has become the currency of an economic area which roughly equals the united states in terms of economic size and external trade, and which has the world ’ s second largest capital markets. the international role comprises a number of functions, which can be distinguished according to the official use of the euro and its use for private transactions. concerning the former, the euro might be considered for official interventions in the foreign exchange market and similarly as a currency for official reserve holdings. moreover, in the context of formal exchange rate arrangements, those countries that previously pegged their currency to one of the participating euro area currencies might, in future, peg their national currency to the euro. private investors will use the euro for the international exchange of goods and services and for all kinds of portfolio investment. with regard to portfolio investment, the private use of the euro spans a broad spectrum from currency trading, bond and securities issues to investment in stocks. one of the key elements encouraging international portfolio diversification in favour of the euro is the creation of a large, liquid and integrated capital market in europe that began with the launch of the euro. for short - term instruments, we are now dealing with a broad and liquid european money market that ensures very similar short - term interest rates for comparable instruments and credit risks. the development of this market has been strengthened by the eurosystem ’ s operational framework of open market operations, which is mainly based on reverse transactions, and the implementation of the new target real - time gross settlement payment system in participating countries. at the longer end of the maturity spectrum, market integration was jump - started by the re - denomination of outstanding government debt in euro and by the convergence of interest rates to narrower spreads following the elimination of exchange rate risk. the elimination of this risk will also foster the development of uniform market standards so that government bonds in the euro area will become relatively close substitutes, creating a large and liquid bond market. obviously, this requires sound and sustainable budgetary policies that ensure that credit risk spreads remain small. among the important determinants of the international role of the euro two factors stand out, namely the size of the financial market and confidence in the currency. it is widely recognised that a large degree of openness of