lucas papademos : economic outlook in the euro area statement by mr lucas papademos, vice - president of the european central bank, at the 2008 asia - europe ( asem ) finance ministers ’ meeting, jeju, korea, 16 june 2008. * * * introduction it is a great pleasure for me to participate in the asem finance ministers ’ meeting. in my statement, i will focus on the economic outlook in the euro area, with special emphasis on inflation prospects and risk, the monetary policy stance of the european central bank ( ecb ), recent financial market developments and our assessment of the outlook for financial stability. economic outlook the pace of economic activity in the euro area is expected to decelerate in 2008 and 2009 from the robust 2. 7 % gdp growth rate recorded last year. the eurosystem staff projections, published on 5 june 2008, foresee annual real gdp growth in the range between 1. 5 % and 2. 1 % in 2008, and between 1. 0 % and 2. 0 % in 2009. recent growth forecasts for the euro area by the european commission, international institutions and organisations and the private sector are broadly in line with the eurosystem staff projections. all in all, our latest assessment, based on the macroeconomic projections produced by the staff of the eurosystem, and our analysis of the most recent information, from data and survey indicators, confirms the expectation of moderate but ongoing economic growth. both domestic and foreign demand are expected to support gdp growth in 2008. the resilience of global economic growth, which benefits from the robust economic activity in emerging market economies, should support euro area exports. domestic factors, however, are expected to contribute the largest part of euro area growth in both 2008 and 2009. in particular, non - residential private investment is expected to provide support to economic activity, as capacity utilisation remains high and profitability has been sustained in the nonfinancial corporate sector. this outlook for economic growth is surrounded by continuing high uncertainty and downside risks prevail. the financial market turmoil could have a more adverse impact on the real economy than currently anticipated. in addition, further unanticipated increases in energy and food prices could have dampening effects on consumption and investment. there are also risks stemming from the possible emergence of protectionist pressures and from the still large, though declining, global imbalances. turning to price developments, the outlook for price stability in the euro area has deteriorated

policy against this background – the prospect of stronger and more protracted inflationary pressures than previously envisaged and the assessment of the increased upside risks to price stability over the medium term – the governing council indicated that it is in a state of heightened alertness and ready to act in a firm and timely manner to prevent second - round effects and ensure that risks to price stability over the medium term do not materialise. the governing council also emphasised its commitment to maintain price stability in the medium term and its strong determination to secure a firm anchoring of medium and long - term inflation expectations in line with price stability. financial markets let me now turn to financial market developments and the financial stability outlook in the euro area. the financial system of the euro area is still undergoing further adjustment as the processes of risk repricing and de - leveraging continue. the stresses on the financial system have persisted longer and they have become broader and deeper than anticipated six months ago. although there have been some signs of easing tensions in certain markets since mid - march, elevated pressures remain in others, notably in the term money markets of major currencies. moreover, high uncertainty surrounds the future dynamics of property prices, the magnitude of possible further asset valuation write - downs by financial institutions and the effects of the market turmoil on the broader economy. over the past two months, money, credit and other financial markets appear to be sending mixed signals. the term money market spreads between euro deposit and eonia swap rates have remained high and close to record levels, for maturities from three to twelve months. tensions in the term money market continue to be a global phenomenon. currently, the spreads between three - month deposit and overnight - indexed swap rates are virtually the same in the euro, us dollar and pound sterling money markets. in the credit markets, greater risk awareness by banks and increased bank funding costs have been reflected in the significant and general further tightening of lending standards in the euro area, the uk and the us. at the same time, credit default swap ( cds ) indices in europe and the us have declined since mid - march ( though recently they have increased somewhat ), the availability of bank credit to households and non - financial corporations in the euro area has not been significantly affected by the financial market turbulence, and corporate bond spreads have narrowed moreover, the functioning of the leveraged loan market is showing some tentative signs of improvement. with regard to the impact of the market correction on bank profits, the write - downs disclosed by