the economy is bound to recover, but recovery is not necessarily just around the corner. the imf expects the us economy to grow at a rate of 2. 2 % in 2003. according to this es - timate, the euro area can expect gdp growth of 1. 1 %, while germany should brace for a third year in a row with significantly sub - par growth of 0. 5 %. in 2002, north america and non - japan asia were the main contributors to world output growth, with the euro area and japan lagging behind significantly. two implications are worth consideration : 1. first, the world economy is depending far too heavily on the us taking the driver ’ s seat. the euro area and japan must work on improving their ability to produce self - sustained economic growth. 2. second, the world economy is even more fragile than this tilted growth performance suggests at first sight, for the growth path of the us economy itself is somewhat unbalanced. its macroeconomic imbalances deserve careful addressing. the expectation that the world economy will return to a healthy and stable growth path once the dust of war in the middle east has settled is unrealistic to begin with. obviously, the workload for the world economy to return to healthy growth will be high on both sides of the atlantic. in the euro area structural weaknesses have been building up for more than a decade. they are well known, as is the adequate therapy. labour market inflexibility is the core european weakness. in a currency union, market flexibility is all the more crucial as exchange rates can no longer cushion asymmetric shocks. the euro - area countries now need to seize the opportunity to embark on serious reforms during times of crisis, where the reform zeal is more pronounced than at more quiet times. the key message the present situation of the world economy conveys for europe is that europe would be well - advised to improve its ability to grow on its own. a tripolar economic and financial world cannot afford to rely on one pole only. europe, especially now that european union enlargement is just a year away, has a responsibility to assume in at least three areas : the political, the financial and the economic field. we are prepared. we have strengths we can build on. the framework for economic and monetary union is sound and strong. you probably know that a european convention is working on drafting a european constitution. for over four years we have had a single currency, the euro. first,

inadequate rules is not confined to banks. artificial additional demand for sovereign debt may lead to distorted price signals and, as a consequence, to private investment being crowded out. and of course, it gives governments the wrong incentives. even central banks are affected, because they accept sovereign bonds as collateral when lending money to banks. thus, neglecting sovereign risk is not only inconsistent both from an economic and a regulatory view ; it also produces sizeable side - effects in other domains. the european debt crisis is the best evidence there is on the detrimental linkages between states and domestic banks. we can only contain these unhealthy relationships if we target the root causes, such as the lack of regulatory treatment of sovereign risk. what could be the therapy? it would consist of two components : non - zero risk weights as well as concentration limits for sovereign exposures. concentration limits directly relate to a fundamental principle of banking : never put too many eggs in one basket. in the status quo, euroarea sovereign bonds are exempt not only from non - zero risk weighting, but also from the existing concentration limits. 4. the road ahead of course, simply believing that the euro - area architecture contains structural flaws will not, in itself, invoke change. transitioning towards a more desirable order may get tough for those affected. banks do not only make some of their money with sovereign bonds ; they also use this paper as collateral in interbank markets and for their borrowing from central banks. also, increased holdings in sovereign bonds have helped banks comply with stricter capital requirements and newly enacted liquidity requirements. for example, german banks were able to improve their capital ratios partly by increasing their holdings of euro - area sovereign bonds relative to investments, which lowered their rwas. amending the regulation of sovereign risk gives rise to a number of tasks in the management of banks. a similar storyline can be told about states that are highly indebted. putting an end to subsidised lending will often be onerous. some may also be worried about cliff effects. 4 / 6 bis central bankers'speeches we need to take those temporary burdens into account. whatever path the european financial architecture is taking, we need to ensure that it is not only viable, but also feasible in the first place. but the fact that resistance to reforms happens for a reason does not mean that it is a superior reason. this is evident in the field of government financing. markets have not been able to discipline governments. but