the challenges and risks of the present world. i would now like to consider my third question : what challenges lie ahead for the single currency? despite all the achievements, this is not the time for complacency. there are important challenges. the most important and most direct is of course to tackle the financial market turbulence and the economic downturn. but there are also challenges which go beyond tackling the current situation. but they are related to it in part. i would like to consider three challenges briefly : the securing of sound government finances, structural reforms in the euro countries and the expansion of the euro area. securing of sound government finances sound government finances are critical. they complement the ecb ’ s stability - oriented monetary policy. they prevent the fiscal policies of one country in the euro area from having negative effects on other countries. beyond that, sound finances make a national economy more flexible. they are part of a growth - friendly environment. the fiscal policies of the member states should promote the smooth functioning of europe ’ s economic and monetary union. the stability and growth pact is the instrument to guarantee this. the pact is the most important pillar in the economic union. it supports the monetary union. the strict and credible implementation of the stability and growth pact is essential. against the background of the current economic developments, it offers the necessary flexibility. shortfalls in tax revenues and additional expenditure arising automatically from the economic situation support the economy. where there is room for manoeuvre, additional fiscal policy measures can be effective. they should be timely, targeted and temporary, and take account of the respective country - specific situation with regard to state finances. notwithstanding all budgetary measures for supporting the economy in the short term, we need to ensure the sustainability of fiscal policy in the medium to long term. public confidence in the soundness of state finances must not be undermined as this would also impair the effectiveness of the economic policy measures. therefore, “ exit strategies ” from the current fiscal stimuli should be already thought of. structural reforms structural reforms in the countries of the euro area are very important for two reasons in particular. they are necessary in order to enhance the flexibility and resilience of the euro area economy and to increase its growth potential. such structural reforms relate to the markets for goods and services, and the labour market. reforms of the goods and service markets should strengthen competition and accelerate an effective restructuring. an example of successful reform is the telecommunications sector, where liberalisation has enhanced competition,

a very slow pace. in personal consumption, outlays on services such as travel services have shown a moderate increase, while outlays on goods, as indicated by sales of automobiles and household electric appliances as well as department store sales, have remained sluggish. in addition, housing starts have declined more recently to 1. 3 million from the 1. 5 million per annum level prevailing until spring 1997. with such weakness in final demand, inventory adjustment pressures remain in the consumer durables - and construction - related industries, and thus industrial production has been declining slightly. such developments seem to be gradually affecting employment and income. however, this year ’ s temporary economic slowdown is inevitable in that the economy is at a phase in which the downward pressures of fiscal tightening appear most strongly. the concern is how these developments will affect the momentum of the self - sustained economic recovery in 1998. at present, corporate profits and employment income, which form the basis of the self - sustained recovery, continue to be on an upward trend. therefore, it is unlikely that the economy has entered a recession. however, there is some weakening of the virtuous circle of production, income, and expenditure, and if this trend continues, it may undermine the strength of the self - sustained recovery. the bank will therefore continue closely to monitor the pace of recovery in consumption, progress in inventory adjustment, and developments in household and corporate sentiment. meanwhile, prices have remained stable on the whole. domestic wholesale prices have continued to decline slowly, particularly those of construction materials. consumer prices, after excluding the effect of the rise in the consumption tax rate, have been at a level slightly above that of the previous year, and corporate service prices remain at the previous year ’ s level. in view of such economic and price conditions, the bank is determined to observe developments carefully in managing monetary policy, placing emphasis on strengthening the foundation of the economic recovery. in the conduct of market operations, the bank intends to continue supplying sufficient liquidity to the financial market, to thereby ensure smooth transactions and stability of market interest rates. - 8b. lending attitude of financial institutions with regard to the recent financial situation, there have been various discussions concerning the cautious lending attitude of financial institutions. today, financial institutions are faced with many challenging management issues, such as expeditious disposal of nonperforming loans, as well as implementation of measures to deal with the japanese “ big bang ” financial reform and with the introduction of prompt corrective action