would probably dampen both foreign and domestic demand. finally, the effects of oil prices on growth and inflation will not depend only on the amplitude and duration of the oil price rise, but also on the appropriateness of the responses of our authorities and economic agents. lessons learned from the bad experience of the 1970 ’ s, when there were desperate attempts to compensate the consequences of the oil shock by lax budgetary and wage policies, must not be forgotten. most forecasting institutes expect for the euro zone this year and next year growth rates between 2 and 2. 25 p. c. close to the growth potential of the zone. that would be good to have but that should not be a reason to be satisfied. what is needed are efforts to make the european economy more resistant to external shocks as those which have reduced its growth in the latest years and to increase its long term growth potential. europe has to cope with a structural problem of low economic growth. the growth performance of the euro area is weak from an international point of view, in particular compared to the united states : over the past 10 years the american economy has shown an average gdp growth of 3. 3 p. c., while the euro area could only reach an economic growth of 2 p. c. it is necessary to specify that given unequal population growth further analysis shows that the difference in real gdp growth is half the size if calculated in per capita terms ( per head ). the fact remains however that since the mid 90 ’ s the gap in product or income per head between the us and the euro zone has significantly widened. macroeconomic policies are not the explanation of the weaker growth in the euro zone. first of all this is true for monetary policy. in less than six years the new ecb has gained a high degree of credibility. the euro zone has witnessed a period of low rates of inflation and low levels of short term and long term interest rates. for months the ecb ’ s nominal central rate has been maintained at 2 p. c., that means zero in real terms, and the level of market long term interest rates ( the most important rates in the euro zone for the financing of investments by enterprises, households and government ), which has fluctuated around 4 p. c., is lower than in the us. in the fiscal sphere, almost all the governments in the euro zone allowed the automatic stabilisers to take full effect during the recent slowdown, and that effect was often reinforced by discretionary

the entire effort. perhaps no policy approach or set of institutional arrangements could have eliminated the 1970s inflation at a lower cost than was actually incurred. if so, then the significance of paul volcker ’ s appointment was not its immediate effect on expectations or credibility but rather the fact that he was one of the rare individuals tough enough and with sufficient foresight to do what had to be done. by doing what was necessary to achieve price stability, the volcker fed laid the groundwork for two decades, so far, of strong economic performance. but see rogoff ( 1987 ) for a critique of models of central bank reputation. evidence on the behavior of inflation expectations after 1979 supports the view that the public came to appreciate only very gradually that volcker ’ s policies represented a break from the immediate past ( erceg and levin, 2001 ).