explain our assessment in greater detail, starting with the economic analysis. following the 0. 3 % quarter - on - quarter increase in euro area real gdp in the fourth quarter of 2010, recent statistical releases and survey - based indicators point towards a continued positive underlying momentum of economic activity in the euro area in early 2011. looking ahead, euro area exports should be supported by the ongoing recovery in the world economy. at the same time, taking into account the relatively high level of business confidence in the euro area, private sector domestic demand should increasingly contribute to economic growth, benefiting from the accommodative monetary policy stance and the measures adopted to improve the functioning of the financial system. however, the recovery in activity is expected to be dampened somewhat by the process of balance sheet adjustment in various sectors. in the governing council ’ s assessment, the risks to this economic outlook remain broadly balanced in an environment of elevated uncertainty. on the one hand, global trade may continue to grow more rapidly than expected, thereby supporting euro area exports. moreover, continued strong business confidence could provide more support to domestic bis central bankers ’ speeches economic activity in the euro area than currently expected. on the other hand, downside risks relate to the ongoing tensions in some segments of the financial markets that may potentially spill over to the euro area real economy. downside risks also relate to further increases in energy prices, in particular in view of ongoing geopolitical tensions, and to protectionist pressures and the possibility of a disorderly correction of global imbalances. finally, there are potential risks stemming from the economic impact on the euro area and elsewhere of the recent natural and nuclear disaster in japan. with regard to price developments, euro area annual hicp inflation was 2. 6 % in march 2011, according to eurostat ’ s flash estimate, after 2. 4 % in february. the increase in inflation rates in early 2011 largely reflects higher commodity prices. pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. it is of paramount importance that the rise in hicp inflation does not lead to second - round effects in price and wage - setting behaviour and thereby give rise to broad - based inflationary pressures over the medium term. inflation expectations must remain firmly anchored in line with the governing council ’ s aim of maintaining inflation rates below, but close to, 2 % over the medium term. risks to the medium - term outlook for price developments remain on the

in productivity. on the labour market, the priority must be to enhance wage flexibility and incentives to work, and to remove labour market rigidities. finally, the governing council is of the view that the package of six legislative proposals on economic governance, adopted by the european council at its summit on 24 – 25 march 2011, goes some way to improving economic and budgetary surveillance in the euro area. however, in our view, the proposals fall short of the necessary quantum leap in the surveillance of the euro area which is needed to ensure the smooth functioning of economic and monetary union. therefore, the governing council, in line with the ecb ’ s opinion of 17 february 2011 on these proposals, urges the ecofin council, the european parliament and the commission to agree, in the context of their “ trialogue ”, on more stringent requirements, more automaticity in the procedures and a clearer focus on the most vulnerable countries with losses in competitiveness. all this would help to ensure that the new framework is effective in the long run. bis central bankers ’ speeches