which will also create room for further tax cuts and absorb the fiscal costs of population ageing. this reform agenda, as well as the urgent structural reforms relating to product, labour and financial markets, will be addressed in the forthcoming broad economic policy guidelines. overall, such reforms reflect the key challenge for the euro area to expand its potential for non - inflationary growth and to reduce its high level of unemployment. the governing council calls upon member states to make faster progress in accelerating and deepening structural reforms in order to provide economic agents with the proper incentives to enhance efficiency and entrepreneurship and to progress towards a knowledge - based economy as proclaimed in the lisbon agenda and confirmed in barcelona. we are now at your disposal for questions.

##ng assessments. but we have to face this challenge, because temporary and persistent shocks to productivity growth may have opposite effects on inflation developments. if the decline in productivity growth is temporary, its effect on aggregate demand is likely to be limited because the lifetime incomes of households are not significantly affected. at the same time, the aggregate supply of output will be temporarily depressed. the resulting excess demand is likely to have an inflationary impact. if, by contrast, the productivity decrease is considered to be persistent, ( perceived ) wealth and aggregate demand are likely to decline, leading to a situation of excess supply that will have a negative impact on inflation. incorrect perceptions or estimates of underlying productivity developments can easily lead to policy errors and costly adjustment processes. the inflationary episodes of the 1970s provide telling examples in this respect and research at the federal reserve clearly highlighted the potential risks. 5 research carried out at the ecb confirms these findings and suggests that imperfect information about potential output growth can have substantial adverse effects on macroeconomic outcomes. even if central banks continuously update their estimates of potential output and, in doing so, they fully exploit all available information, misperceptions of potential output growth can be substantial and persistent ex post. of course, “ to make no mistakes is not in the power of men ; but from errors and mistakes the wise and good learn wisdom for the future ” – as plutarch once remarked. heeding his counsel, it appears advisable for us policymakers to account for and address the uncertainties that are inherent in identifying the underlying productivity pattern by employing an appropriate and robust policy framework and implementing policy in a consistent manner. iv. the influence of financial innovation and development structural changes and associated uncertainty about the stability of structural and behavioural relationships are not confined to the real economy. financial markets and institutions have been undergoing a remarkable transformation over the past 20 years as a result of deregulation, advances in information technology and financial innovation. the pace of financial development and innovation has markedly increased in recent years. let me just give you one figure that exemplifies the dimensions of this phenomenon : in the first six months of this year, the global derivatives market ( according to the bank for international settlements ) increased by almost 25 %, reaching 370, 000 billion us dollars. that ’ s 370 and twelve zeros! new financial instruments are continuously being introduced, and non - bank financial institutions are playing a more prominent role in the intermediation process than in the past. see ecb