capital, labour and product markets are overarching and very broad. in many cases they need to be translated into concrete policy measures at the european and / or the national level. starting with capital markets, the pace of reform in this field has been impressive over the last years in anticipation and since the introduction of the euro. this includes policy - induced reform, such as the financial services action plan ( fsap ) or the development of national legal frameworks governing the issuance of mortgage bonds. reform covers also market - led initiatives, such as the development of electronic trading platforms or consolidation in the clearing and settlement infrastructure. despite the past achievements the need for continuation and completion of the reforms remains. this relates first to the completion and implementation of the fsap and its follow up. the fsap should give rise to genuine common financial legislation and regulation for market players. the so - called lamfalussy framework, which allows for flexible technical rules at the eu level complemented by enhanced co - operation as regards national implementation and enforcement, has for good reasons been extended from the securities field to banking, insurance and financial conglomerates. a second area of structural reform in capital markets is the further consolidation and integration of market infrastructure and the further harmonisation of the standards and conventions routinely used by market participants. there is a large variety of remaining obstacles to a fully integrated and efficient euro area market which still needs to be addressed by the relevant actors. a simple but telling example of the benefits that collective action can bring in this regard is the development of the eonia overnight interest rate index by market participants organised within a trade association. this index has become the generally accepted reference in the euro overnight interest rate swap market, leading in turn to the impressive development of this particular market segment. turning to labour markets, a number of structural reforms have been undertaken in recent years and efforts are still on - going in several member states. although unevenly implemented across countries, the positive impact of past reforms in the labour market has become visible. output growth became more job intensive towards the end of the 1990s and the estimates of the natural rate of unemployment ( nairu ) in the euro zone tend to show a decline in structural unemployment from the mid - 1990s. however, the high level of average unemployment and the relatively low average employment rate in the euro area, which in 2002 was still around 62 %, compared for example to the united states with almost 75 %, indicate that much more needs to be done. more

however, there is considerable uncertainty which is skewed to the upside, as indicated by the implied distribution for future oil prices, extracted from options contracts ( see chart on the right of slide 10 ). 4. euro area corporate and household sectors turning to the vulnerabilities in the euro area economy, while the financial position of the euro area corporate sector has remained relatively sound at an aggregate level, the likelihood of a turn in the credit cycle, while still low, may have risen. this is because the amount of debt on firms ’ balance sheets has continued to grow, as has the cost of rolling over short - term debt. corporate profitability, although high, could be adversely affected by a less favourable macroeconomic outlook, tighter credit standards and the higher cost of debt. one issue highlighted on several occasions throughout the current year is the risk associated with leverage buy - out ( lbo ) transactions. the financing packages granted to the largest lbo projects finalised in 2006 and 2007 were characterised by excesses that bear some similarities to the practices in the us sub - prime mortgage markets. a further deterioration of financing conditions could cause some of the firms involved to default, with adverse consequences to the collateralised loan obligation ( clo ) market where lbo loans are frequently used in asset pools. in addition, a number of new large lbo deals have been delayed or restructured and some planned transactions have been withdrawn from the market due to the turmoil ( see chart on the left of slide 11 ). all in all, most market - based indicators suggest that the current outlook for the euro area non - financial corporate credit quality, while deteriorating somewhat, still remains overall fairly solid. default rates have remained low, but they started to rise in the second half of 2006 for the first time since 2003 and are expected to rise further in the period ahead. the balance between credit rating upgrades and downgrades of non - financial corporations remained at a level close to that observed over the previous years. with regard to risks in the euro area household sector, despite some heterogeneity across euro area countries, the latest available data confirm a gradual moderation in the annual rate of house price inflation. in those countries where overvaluation appears to be most acute, house market price developments continue to represent a source of risk for household sector balance sheets, although income growth will typically be a more decisive determinant of the overall risk to household finances in euro area economies. at the same time,