in real disposable income, as labour market conditions continue to improve. the risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. at medium to longer horizons, the balance of risks remains on the downside, owing mainly to external factors. these relate in particular to fears of a rise in protectionist pressures, the possibility of further increases in oil prices, concerns about possible disorderly developments owing to global imbalances and potential shifts in financial market sentiment. as regards price developments, as reflected in eurostat ’ s flash estimate, annual hicp inflation was 1. 9 % in june 2007, unchanged from previous months. looking ahead, the short - term profile of annual inflation rates continues to be determined largely by current and past energy price developments, as last year ’ s volatility in energy prices leads to significant base effects. on the basis of the current level of oil prices and oil price futures, which show an upward slope, annual inflation rates are likely to fall only slightly in the months ahead before rising again significantly towards the end of the year. at the policy - relevant medium - term horizon, risks to the outlook for price stability remain on the upside. these risks relate notably to the domestic side. in particular, as capacity utilisation in the euro area economy is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage developments. in addition, pricing power in market segments with low competition may increase in such an environment. such developments would pose significant upward risks to price stability. it is therefore crucial that all parties concerned meet their responsibilities. wage agreements in particular should be sufficiently differentiated to take into account price competitiveness positions, the still high level of unemployment in many economies and sector - specific productivity developments. the governing council stresses the importance of avoiding wage developments that would eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens. in addition, upside risks to price stability arise from increases in administered prices and indirect taxes beyond those anticipated thus far, and the potentially procyclical stance of fiscal policy in some countries. finally, on the external side, upside risks stem from the possibility of further unexpected oil price rises. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer horizons. the underlying rate of monetary expansion remains strong, in a context of already ample liquidity. the ongoing strength of monetary expansion is reflected in the continued rapid growth of m3, which increased

- border comparisons, for instance. such a body should be able to monitor the build - up of excessive risks and pinpoint them more easily and at an earlier stage. a single supervisory mechanism should also overcome the national bias of supervisors. but a single supervisory mechanism is not sufficient. to shield banks from weak public finances, it must be accompanied by a sound regulatory underpinning. such regulation should include upper limits for lending to governments and appropriate capital backing for sovereign bonds. finally, a banking union should comprise a european resolution and bis central bankers ’ speeches recovery mechanism to ensure that bank creditors – and not taxpayers – are the first in line to bear losses from a bank ’ s failure. such a comprehensive banking union will be an important element of the new institutional framework of the monetary union. it will bring about significant changes not only for banks and their stakeholders, but also for regulators and supervisors with functions being transferred from the national to the european level. 3. financial sector reforms changes will also be made through financial sector reforms. the financial crisis has highlighted weaknesses in financial sector regulation. as a response to this, the g20 heads of state or government set in train a comprehensive reform agenda in november 2008. in the meantime, we have passed a number of major milestones on that agenda. but to make the international financial system as resilient and robust as it should be, we still have a long way to go. one of the most pressing issues is the implementation of basel iii. what is most worrying is that doubts about implementation have been voiced with respect to countries that are home to global financial centres and systemically important institutions. i consider it of utmost importance that all g20 countries live up to their self - commitment of leading by example. the initial implementation timelines have been modified in the eu and the us. we need to make sure that such delays do not lead to a watering down of the measures that we agreed upon internationally. stricter banking regulation might set incentives to move business to less regulated entities. the regulation of the shadow banking system is therefore another pressing issue. regular monitoring exercises help us to gain a better understanding of the kind and scale of business conducted outside the regulated banking system. but its actors and activities still remain largely unregulated. i consider it particularly important to deliver a final set of integrated recommendations on regulating the shadow banking system to the g20 in september. and it is absolutely crucial to finally solve the too - big - to - fail problem. however, we