producers, and restrict the capability of retailers to cultivate privileged market positions. discernible progress with regard to labour market reform has also proved a good leading indicator for unemployment reduction and robust growth. high rates of turnover in the labour market are a signal that employers enjoy greater flexibility in tailoring their staff numbers to production needs. we know how innovative ideas and advanced technologies spread in waves, and how these waves can become a vehicle of economic dynamism and, ultimately, of social promotion. but the introduction of a new technology requires flexibility of other factors, including labour, if production processes are to be reorganised most efficiently. if there are limits and restrictions to the choice of the most profitable combination of productive factors, firms will be inefficient and the full possibilities of a new technology will not be exploited reducing both, the welfare of workers and the employment prospect of the employed. in this area as well we see indications that the traditional hurdles to innovation and competition in our labour markets are – slowly – being removed. it appears to be increasingly important in national wage negotiations to assess the implications of domestic pay settlements for regional competitiveness and unemployment. sectoral and regional differences in productivity and in levels of unemployment – not the traditional cost - push dynamics of the past – are becoming the benchmark against which social parties assess the sustainability of wage advances at the national level. deregulation and productivitydriven wage negotiations which take into account labour supply have still to impose themselves as a common and lasting practice. however, we do see cross - border competition already placing strain on economic decisions taken within domestic borders. empirical results lend support to the idea that financial market deepening contributes to overall economic growth. the related argument has also been made that financial market deepening would improve especially the prospects of young, dynamic and risky firms. these are typically the enterprises that tend to bring new technologies to the market. in other words, the type of firms that create the waves of creative destruction noted by schumpeter. but with a less developed financial market this is precisely the category of firms that, in the absence of sufficient tangible collateral, would have their credit rationed. we expect that further deregulation as well as common european standards for regulation and the progressive integration of national financial markets in a unified area transacting in the euro will increasingly grant easier access to venture capital and allow agents to efficiently pool risks both domestically and internationally. the private sector will thus be in a better position to cope with

in the average deficit ratio for the euro area as a whole will come to a halt in 2001 as large tax cuts throughout the area are being implemented without due compensation on the expenditure side. while we commend tax reform with an eye on the long - time growth prospects of our economy, we are concerned by these signs of fatigue, particularly in those countries where robust growth would allow scope for a more resolute drive towards the adjustment that is still needed. the need for structural reform certainly, we cannot ask more of the stability and growth pact than it can possibly deliver. the pact can make budgets more responsive to economic conditions, but it cannot address more fundamental issues. in particular, long - term unemployment cannot be tackled through subsidies and extended money hand - outs. an effective cure against structural unemployment requires on the part of governments an uncompromising commitment to reform the structural and regulatory underpinnings of our economies. i regard this as perhaps the major challenge that national authorities will have to face at the start of the new millennium. it is therefore crucial to recognise that appropriate economic institutions are vital if the jobless are to be brought to more tolerable numbers over an entire business cycle. new institutional arrangements must revive the incentives to create new vacancies and to seek and accept new jobs. it is undeniable that the most dynamic industrialised economies of the past decade are those which pioneered the drive towards dismantling monopolies and converting industries traditionally dominated by one or two – in most cases state dominated – firms into more competitive and contestable markets. the intensification of competition that has ultimately resulted from liberalisation and deregulation has made for downward pressures on prices. the ecb recently published a study of the effects of regulatory reforms in network industries ( " price effects of regulatory reforms in selected network industries ", ecb, march 2001, available on the ecb website www. ecb. int ). these initiatives are an example on how reforms that succeed in increasing competition in previously sheltered sectors, considerably enhance social welfare by increasing potential productivity, leading to permanently lower price levels within the industries themselves, and by entailing temporary downward effects on inflation for the economy as a whole. in europe, the introduction of the euro has already contributed to an intensification of competitive pressures across firms, since cross - national comparisons of prices have become more transparent. we expect that the introduction of euro banknotes and coins early in 2002 will further confine the pricing leverage of domestic