upside risks to price stability over the medium term and long term. after moderating in the first half of 2004, m3 growth has strengthened significantly since mid - 2004, reflecting the stimulative effect on monetary dynamics of the historically very low level of interest rates in the euro area. as a result of the persistently strong growth in m3 over the past few years, substantially more liquidity exists in the euro area than is needed to finance non - inflationary economic growth. the exceptionally low level of real interest rates is also stimulating private sector demand for credit. in the context of relatively contained underlying inflationary pressures, the ecb has left its key interest rates unchanged since june 2003. the low level of nominal and real interest rates has provided significant and continued support to the economic recovery. at the same time, upside risks to price stability remain. cross - checking with the indications from monetary analysis supports the case for continued vigilance with regard to those risks. fiscal policies and the stability and growth pact i would now like to make a few remarks on fiscal policies. while some progress on fiscal consolidation and the correction of excessive deficits is envisaged in euro area countries ’ updated stability programmes, further consolidation in a number of countries is needed. with respect to the stability and growth pact, discussions now need to be brought to a convincing conclusion with an outcome that safeguards fiscal discipline. the fiscal framework enshrined in the treaty and in the stability and growth pact is a cornerstone of economic and monetary union, crucial for the economic rationale and the overall cohesion of emu. as the committee on economic and monetary affairs of the european parliament knows, since the beginning of these discussions the ecb has made its views clear. improvements in the implementation of the stability and growth pact, and in particular its preventive arm, would be welcome. but the corrective arm should not be weakened. the credibility of the excessive deficit procedure as a means to deter and correct excessive deficits needs to be fully preserved. this is necessary in order to anchor expectations of fiscal discipline, which is fundamental not only for macroeconomic stability and cohesion in the euro area but also for enhancing confidence and fostering growth prospects in all member states. the lisbon strategy let me now turn to the forthcoming mid - term review of the lisbon strategy. the lisbon strategy was designed in 2000 to push forward structural reforms, which europe so urgently needs in order to maintain its high level of prosperity. structural reforms raise european economies ’ growth

- looking investments by distributing funds efficiently. and we need banks that are prudent in their lending. what should be done? policies need to be chosen wisely, away from the extreme, ideologically tainted positions. we should certainly not think that our modern economies can thrive without the catalytic functions of banks and financial markets. on the other hand, we should not fall prey to claims that regulatory reform and limitations of market freedoms will hurt development. policies should aim to enable financial markets to work at the service of the economy – as a supporting function. at the same time, these policies should aim to limit those transactions that only serve profit - maximisation while externalising costs to taxpayers. this might imply somewhat lower volumes of financial market transactions and somewhat lower credit volumes. what does this mean? from the perspective of banking and financial market supervisors, it means that we need to regulate risky trading strategies and risky business models more rigorously. therefore, to give you just one example, we now expect institutions with such approaches to refinance themselves to a greater extent using equity, rather than debt. practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back [ … ] ” ( jm keynes ( 1936 ), the general theory of employment, interest and money. macmillan, p 383 ). bis central bankers ’ speeches from a political perspective, this means that we cannot rely on financial markets to fix structural political problems. for example, if it is felt that the income of low income households is growing too slowly, it is not enough to simply rely on credit institutions to finance investments in the hope that this will create jobs. this is because the financial markets would provide more loans to such households – and if this is not sustainable, it could lead to yet another financial crisis. thus, politics must enable banks and markets to support the economy, not to fix it. finally, let ’ s turn to capital liberalisation in emerging markets. full capital account liberalisation may not be the best strategy for many developing and emerging economies. a careful analysis of national circumstances is needed here – followed by a careful choice of economic policies. 7 here, too, simply hoping for more finance to lead to more development is a tempting strategy, but not a promising one. as is the case in advanced economies, one