klaus liebscher : a stable euro for a strong europe panel statement by dr klaus liebscher, governor of the austrian national bank, at the european banking & financial forum, prague, 25 march 2003. * * * it is a great pleasure for me to participate once again in the european banking & financial forum here in prague and i congratulate the organizers for the interesting topics they have chosen this year. i would like to focus my deliberations on the state of the economy, on the stability - oriented framework of emu, including the need for further reforms required to enhance the euro area's noninflationary growth potential, and - last but not least - on the eu enlargement process. the governing council of the ecb decided on march 6 to reduce the key interest rate by 25 basis points to 2½ %. this decision was taken in the light of an improved outlook for price stability, owing in part to the appreciation of the euro and the subdued pace of economic growth in the euro area. the latter must be seen in the context of increased geopolitical risks over a protracted period of time, which once again led to higher oil prices. additionally, a fundamental downward correction of companies'profit expectations as well as increasing pessimism on the part of consumers and investors have substantially dampened demand and depressed stock prices in the industrial world. however, apart from these unfavourable shocks, some structural inefficiencies have also been holding back the euro area economy. forecasting the future is notoriously difficult - even more so under the current geopolitical conditions. heightened volatility in oil markets, for instance, makes it more problematic than usual to assess shortterm inflation developments. however, on the assumption that geopolitical tensions will decrease over time, more fundamental factors should dominate price developments in the euro area. the significant appreciation of the euro over the past year, which will feed through to the economy via lower import and producer prices, subdued economic activity and somewhat more modest wage settlements should dampen inflation in the medium term. if oil prices moderate, as indicated by futures, inflation rates in the euro area will most likely fall below 2 % in the course of 2003 and should remain at levels in line with price stability thereafter. against this background, interest rates in the euro area have fallen to very low levels, both in nominal and real terms. on the basis of currently available information, this policy stance, while contributing to

owe to your shareholders and clients. the arrc ’ s work began by focusing on creating a derivatives market for the secured overnight financing rate ( sofr ), its recommended alternative to u. s. dollar libor, because end users require derivatives markets to hedge their cash exposures. the cme group, lch, and intercontinental exchange, or ice, all now offer futures or swaps markets on sofr, and participation in these markets is growing. as liquidity in these markets continues to develop, my hope is that many of you will avail yourselves of them to close out your libor positions. in the meantime, it will be crucial in ensuring global financial stability that everyone participate in the international swaps and derivatives association ’ s ( isda ) consultations on better fallback language for libor derivatives and then sign the isda protocol so that these fallbacks apply to the legacy book of derivatives. likewise, the arrc has now offered better fallback language for new issuance of cash products that refer to libor. it seems clear that much of the contract language being used currently did not envisage and is not designed for a permanent end to libor. the arrc ’ s fallback recommendations represent a significant body of work on the part of a wide set of market participants and set out a robust and well - considered set of steps that expressly consider an end to libor. 2 i urge everyone to avail themselves of this work ; it is, again, important for prudent risk management and your fiduciary responsibilities that you incorporate better fallback language. 1 / 3 bis central bankers'speeches issuers should demand it of themselves, and investors should demand it of issuers. there is, however, also another and easier path, which is simply to stop using libor. at this moment, many seem to take comfort in continuing to use libor — it is familiar, and it remains liquid. but history may not view that decision kindly ; after libor stops, it may be fairly difficult to explain to those who may ask exactly why it made sense to continue using a rate that you had been clearly informed had such significant risks attached to it. and make no mistake — as good as the fallback language may be, simply relying on fallback language to transition brings a number of operational risks and economic risks. firms should be incorporating these factors into their projected cost of continuing to use libor, and investors and borrowers should consider them when