. as this interdependence within the euro area becomes stronger, the euro area is also becoming a more open economy with increasing extra - euro area trade. extra - euro area exports and imports of goods rose from about 24 % of gdp in 1998 to around 33 % in 2006. over the same period, extra - euro area exports and imports of services increased from about 8 % of gdp to almost 10 %. these developments clearly show that we are not witnessing the creation of a “ fortress europe ”. on the contrary, european integration complements global integration. i should like to thank malin andersson for her input into this speech, klaus masuch and hans - joachim klockers for their helpful comments, and philippe leclercq, katherine brandt and antonio afonso for their additional contributions. ii ) as a second feature, the introduction of the euro has contributed to financial integration which, in turn, improves the free movement of capital in the euro area. financial integration enhances the efficiency of economic mechanisms, strengthens competition and raises the potential for stronger economic growth. for example, recent research by london economics estimated the benefits of the integration of eu bond and equity markets to be around 1 percentage point of additional gdp growth over a ten - year period, or approximately €100 billion. 2 financial integration is also crucial, as it enhances the smooth and effective transmission of the single monetary policy throughout the euro area. despite some progress, further financial integration is particularly needed in a number of areas, including in retail banking. iii ) labour mobility constitutes the third feature i should like to mention. lack of openness in some countries increases risks of wage pressures as labour markets tighten. available evidence suggests that, overall, cross - border labour mobility is still limited in most parts of the european union and we still have regulatory barriers across the european union, including the euro area in respect of labour from slovenia. this is in clear contrast to the situation in the united states. iv ) as a fourth and final feature, the degree of synchronisation or co - movement between the different cyclical positions across the euro area countries increased since the beginning of the 1990s. in other words, a large number of euro area economies now share similar business cycles. in addition, current inflation and output growth differences among euro area countries are relatively limited compared with the past. the differences are also similar to those observed across regions or states within the united states. the decline in inflation differentials has been impressive. at

and strengthen further in 2003. this output profile means that there will be an appreciable amount of excess supply in the economy through 2002. because of this, we see core inflation averaging just under 1 ½ per cent in the second half of 2002 — below our 2 per cent target. total cpi inflation should remain below the core rate until late 2002. with slack in the economy starting to be taken up in the second half of 2002, and expected to disappear by late 2003, inflation should move back up close to 2 per cent in about two years. i would now like to reiterate some of the comments i made on current developments last week, when we released our update to the november monetary policy report, and in two speeches i gave in western canada earlier this week. it is now becoming clearer that the canadian economy will strengthen as we go through this year and into 2003. recent data increasingly support the view that a recovery is taking hold. household spending in canada, particularly on interest - sensitive purchases, has been stronger than expected. the latest data on exports and manufacturing activity show signs of recovery. the inventory adjustment is progressing. and with early evidence of a revival in the u. s. economy, the world prices of non - energy commodities appear to have bottomed out. these signs of a pickup in economic activity in canada, and elsewhere, are encouraging. over time, exchange rates should reflect economic and financial developments and prospects. but movements in the canada – u. s. exchange rate do not yet appear to have reflected the recent developments in our economy. and to the extent that the recent depreciation of the canadian dollar risks affecting consumer and business confidence in canada, it is clearly not helpful for our economy. furthermore, at this juncture, it is certainly the case that the economic recovery in canada does not hinge on the current low levels of the canadian dollar against its u. s. counterpart. let me sum up. there is a good chance that when the final national accounts data for canada come out, we will see positive, albeit modest, economic growth in both the last quarter of 2001 and the first quarter of this year. at this point, all available data suggest that final demand in the fourth quarter was stronger than we had anticipated. with production coming in at a much lower rate than final demand, the implication is that there has been a sharp rundown of inventories during the fourth quarter. this bodes well for the future, since it underpins the significant