gradual increase in growth over the course of this year was the central forecast, provided the current level of uncertainty gradually unwinds. prospects have disimproved since then. in particular, the geopolitical and international economic uncertainties surrounding these projections have increased. while the last reduction in interest rates and the expected moderation in inflation provide some counterweight to the downside risks, it now seems certain that growth in 2003 will be lower than we thought, even as recently as the end of last year. to the extent that activity remains weak, inflation could fall by more than we projected. in such circumstances, there would be some room for manoeuvre on interest rates. the governing council is always ready to change rates whenever it deems such a move to be appropriate and it does not necessarily have to wait until the current uncertainties dissipate. a significant development over the past year has been the sizeable appreciation of the euro from what was a clearly undervalued level. this should help to dampen inflation and ultimately improve purchasing power. however, the scale of the appreciation, if it were to continue, would undoubtedly slow activity somewhat. in the past, the relatively weak exchange rate of the euro has placed exporters to markets outside the euro area in a relatively favourable competitive position. this is no longer the case. because of ireland ’ s stronger trading links with the us and the uk, the appreciation of the euro has a greater impact for us than it has for other euro area countries. in addition, our inflation rate – at over twice the euro area average – is becoming an ever increasing threat to our competitiveness and, hence, employment situation. i would reiterate, as we have stated for some time now, that this puts the onus back on prudent fiscal policy and appropriate wage and other cost developments to ensure stability. the same is true for the euro area as a whole, with the added qualification of the importance of the need for structural reform to enhance the productivity of euro area economies. this brings us to the salient question of where growth is going to come from in the euro area. this is not an academic question : we in the euro area should be aiming to raise potential output above its current level of around 2¼ per cent ; this is required if we are to reduce the euro area rate of unemployment significantly below its present unacceptably high level and to help prepare for the forthcoming ageing of european populations. and whatever about

, and, while direct exposure to equity markets in the euro area is less than in the us, they have a major signalling effect. all of these factors contributed to a sharp fall in consumer and business confidence in most euro area countries. at the same time persistent inflation, partly associated with oil and food price increases, but also the result of structural rigidities, put a damper on consumer expenditure. december interest rate reduction against the background of deteriorating economic circumstances and evidence that inflationary pressures, if not easing, were at any rate not worsening, it gradually became clear from around the middle of the year that the earlier expectation of a rise in official interest rates would not materialise. and by late autumn, as the economic environment continued to worsen, it was increasingly evident that it was a question of when, rather than whether, the decision to reduce interest rates would be taken. and that decision, as you are aware, which was to reduce the key ecb interest rates by onehalf of a percent, was taken at our meeting on 5 december. a decision in relation to interest rates – to lower them, to increase them, or indeed to leave them unchanged – is rarely easily made. it is always a question of weighing up opposing factors and reaching a decision consistent with the medium - term goal of price stability. this decision was no exception ; monetary growth was well in excess of the reference value, though this excess liquidity was largely the result of portfolio reallocation in an uncertain financial market environment and was unlikely to pose an inflationary threat. the annual rate of inflation in november was a little above 2 per cent, as it had been for most of the previous year, though this was partly as a result of transitory developments, such as the carry - over effects of earlier oil and food price increases and a limited impact from the changeover to the single currency. there was, however, strong evidence of a decline in inflationary pressures going forward, with economic growth remaining sluggish and increasing uncertainty exerting a predictable effect on confidence. the appreciation of the exchange rate was also expected to play its part in reducing inflation. overall the assessment was that the prospect had strengthened for inflation to fall below 2 per cent in the course of 2003 and to remain in line with price stability thereafter. future prospects the reduction in official interest rates came as the eurosystem staff projections for 2003 pointed to a downward revision to both the growth and inflation forecasts. notwithstanding these revisions, a