jurgen stark : knowns and unknowns about the creation of economic wealth in the euro area speech by mr jurgen stark, member of the executive board of the european central bank, at the joint european central bank, bank of france and the conference board conference on “ the creation of economic and corporate wealth in a dynamic economy ”, frankfurt am main, 16 january 2008. * * * it is a pleasure for me to welcome you today. i would like to start by thanking you all for coming to frankfurt to participate in this conference. we are happy to have a good mix of people from academia, industry and european policy institutions in this room. i am sure that sharing your experiences and insights with each other will prove fruitful. understanding the sources of economic and corporate wealth in the euro area is challenging, and in my view there remain many unanswered questions. i am hopeful that you will shed some light on them. allow me to start by reviewing labour productivity developments in the euro area, and in doing so highlighting the knowns and the unknowns. in the sixteenth century the french mathematician viete, building on the arithmetical work done by others before, proposed the use of literal notation for knowns and unknowns, and subsequently introduced the language of formulas into mathematics. his initial proposal of using consonants for knowns and vowels for unknowns was subsequently modified by descartes to what is now common practice, namely the use of the final letters of the alphabet for unknowns ( x, y, z ) and the first letters for knowns ( a, b, c ). viete ’ s seminal, work on symbolic algebra contributed to improving the productivity of mathematicians by allowing them to write a mathematical statement in just a few lines rather than in several pages. in the same spirit, i will try to keep my introductory remarks short and thus contribute to the productivity of our meeting. but, rest assured, i will not go as far as to reduce my speech to a few lines of symbols. demographic developments and growth as the title of this conference indicates, the euro area finds itself in a very dynamic economic environment characterised by rapid technological developments and the progressive integration of regional economies, not simply through trade but also in increasingly modularised supply chains. in addition to these dynamic forces, and in contrast to other regional economies, the euro area is facing now, and even more so in the future, the prospect of an ageing population. in the euro area, a broad decreasing trend in the

impact of increases in oil prices, and more recently elevated food prices shows that ignoring the structural or permanent elements of what is traditionally treated as shocks may slow down appropriate monetary policy response especially if the focus is on " core inflation ". accounting for house rents / prices in inflation measurement has also gained attention in some countries. the central banks are often concerned with the stability / variability of inflation rather than the level of prices. inflation processes have become highly unclear and central banks are faced with the need to recognise the importance of inflation perceptions and inflation expectations, as distinct from inflation indicators. in this context, credible communication and creative engagement with the market and economic agents have emerged as a critical channel of monetary transmission. challenges for emerging market economies it is essential to recognize that the international financial markets have differing ways of judging macroeconomic developments in industrial and emerging market economies. hence, the challenges and policy responses do differ. first, the emes are facing the dilemma of grappling with the inherently volatile increasing capital flows relative to domestic absorptive capacity. consequently, often the impossible trinity of fixed or managed exchange rates, open capital accounts and discretion in monetary policy has to be managed in what could be termed as “ fuzzy ” manner rather than satisfactorily resolved – a problem that gets exacerbated due to huge uncertainties in global financial markets and possible consequences in the real sector. second, in the emerging scenario of large and uncertain capital flows, the choice of the instruments for sterilization and other policy responses have been constrained by a number of factors such as the openness of the economy, the depth of the domestic bond market, the health of the financial sector, the health of the public finances, the country ’ s inflationary track record and the perception about the credibility and consistency in macroeconomic policies pursued by the country. further deepening of financial markets may help in absorption of large capital inflows in the medium term, but it may not give immediate succour at the current stage of financial sector development in many emes, particularly when speed and magnitude of flows are very high. some of the emes are also subject to adverse current account shocks in view of elevated commodity prices. going forward, global uncertainties in financial markets are likely to dominate the concerns of all monetary authorities, but, for the emes, the consequences of such macro or financial disturbances could be more serious. third, the banking sector has been strengthened and non - banking intermediation expanded providing both stability and