guy quaden : the outlook for the european economy, the turmoil in financial markets and monetary policy remarks by mr guy quaden, governor of the national bank of belgium, at a business dinner, dubai, 31 october 2007. * * * i thank you very much for your invitation to this business dinner. i am very pleased to have the opportunity to spend a few days in the united arab emirates, one of the most quickly developing regions in the world and in my eyes one of the most fascinating places to be. i will present some remarks about the outlook for the european ( eurozone ) economy, the consequences of the turmoil in financial markets ( but not about the causes of the turbulence and the first lessons to be drawn : it will be the subject of another speech ) and the stance of the monetary policy. the latest news from europe is not bad. 2006 was an excellent year and prospects for this year and next year remain positive. however the uncertainty surrounding these prospects has increased. the world has been experiencing a fairly long period of economic good times. for a few years the strong activity has been driven only by the united states and the emerging markets whereas europe seemed to stand back. however the pace of global economic activity has become more balanced across the main economic regions. after having gone through a protracted period of subdued growth and short - lived recoveries, europe was in the upswing of a cycle since early 2005, backed in particular by the longawaited recovery in the largest economy of the zone, germany. in 2006, real gdp expanded by 2. 9 % in the eurozone, twice the rate recorded in the previous year. investment increased by 5. 2 % and private consumption also picked - up. gross exports rose by an impressive 8. 2 %. however the contribution of net exports to gdp growth was relatively moderate ( 0. 3 % ) because imports also rose significantly. therefore last year gdp growth in the eurozone was mainly driven by the faster increase in domestic demand, sustained in particular by a steady improvement in the labour market. the number of employed people rose by around 2 million ( 1. 4 % ) and the unemployment rate dropped in 2007 to the lowest level since 1993. moderate wage developments have also contributed to stronger employment growth. that said, the level of unemployment in the eurozone ( close to 7 % ) is still high in comparison with other regions and there remain inefficiencies and rigidities in labour markets to be tackled through further structural reforms. until this

policy rates. what happened? the incoming macroeconomic data remained in line with our baseline scenario and confirmed that risks to price stability are mainly on the upside over the medium term, as identified by both our economic and monetary analysis. however, the continued financial market volatility and ongoing reappraisal of risk has undoubtedly led to an increase in uncertainty surrounding the economic outlook, due to the possible effects of these financial developments on the real economy. therefore, it was appropriate to gather additional information before drawing further conclusions for monetary policy. this ( very attentive ) " wait and see " attitude did not jeopardise the maintenance of price stability over the medium term. indeed, a market - driven tightening of monetary conditions could be observed, as money market rates have risen, lending standards have somewhat tightened and the euro exchange rate has again appreciated. by the way, let me remind you that the eurosystem has no target for the euro exchange rate, as the primary objective concerns internal stability. however, the exchange rate is an important indicator in the economic analysis, in particular to the extent that it influences the overall outlook for price stability. at its last meeting on 4 october, the ecb governing council still considered this outlook for price stability over the medium term to be subject to upside risks. it gave itself a period of time to analyse incoming information in order to refine and update its risk assessment. in particular, should financial market tensions persist or intensify, they would affect financing conditions more significantly and eventually economic activity too. these downside risks are, i think, relevant both for the growth and the inflation outlook, as they have the potential to alleviate some of the expected upward pressure on prices of a cyclical nature embedded in the baseline scenario. conversely, should the financial turbulence fade away and the main scenario be confirmed, our monetary policy should be and would be ready to counter possible upside risks to price stability. uncertainty having increased, times have once again become more challenging for central bankers. more than ever they require from us to make appropriate, overall and forwardlooking judgments.