market liquidity and the opportunity for risk sharing. the bond market ’ s depth has recently increased to 11 trillion dollar, outnumbering the size of euro area ’ s gdp. admittedly, the corporate bond market in the euro area is still substantially smaller than in the us, as european firms traditionally rely more on bank financing. however, firms on this side of the atlantic increasingly make use of debt securities. between 1998 and 2006, the value of outstanding bonds in terms of gdp has doubled, while it increased “ merely ” 60 percent in the us 4. more efficient and deeper financial markets benefit companies through lower borrowing costs. the challenges for emu as we speak, the euro area is undergoing an upturn. economic figures have been better than expected. in 2006, gdp grew by 2. 9 percent, outstripping the united states for the first time in 5 years. unemployment has fallen to 7. 5 percent in 2006, the lowest level in 15 years. while the recovery reflects a cyclical upswing, these figures also suggest that structural reforms in the past are starting to pay off. however, as henry kissinger once said : “ each success only buys an admission ticket to a more difficult problem ”. monetary union ’ s problem is twofold : weak public finances and subdued per - capita - income growth. things have improved, but i am convinced we can do much better. without aiming to be exhaustive, i will mention a few steps that enable countries to tackle these issues and to further capitalise on the advantages of the single currency. creating sustainable fiscal positions a first challenge will be to bring public finances on a sustainable footing. in periods of buoyant revenue growth, there is often a tendency to overestimate the strength of the underlying budgetary position. that is partially because economists can only tell you tomorrow why things predicted yesterday didn ’ t happen today. if spending is allowed to increase on a structural basis, but higher revenues turn out to be transitory, the budgetary position starts to deteriorate as soon as economic conditions turn nasty. this was exactly the mistake made by some countries in the beginning of this decade. let ’ s not repeat that mistake. countries with sizeable deficits and public debts should use the current windfall in tax revenues to consolidate. sound public finances are also crucial for dealing with the costs due to population ageing. while living longer is good news, public expenditures in the euro area are projected to increase by up to 10 percent

raised pertaining to these requirements revolve around the calibration of the ratios, rather than the conceptual basis of the framework. it is important to emphasise the goal in establishing the liquidity framework : to require banks to withstand more severe shocks than they had been able to in the past, thus reducing the need for such massive public sector liquidity support in future episodes of stress. the success of the framework should not be measured in terms of whether it will have zero cost. instead, the better measure of success is whether the framework corrects pre - crisis extremes at acceptable costs. banks that take on excessive liquidity risk should be penalised under the new framework, while sound business models should continue to thrive. with these objectives in mind, the committee will use the observation period to review the implications of the standards – all the more as they are brand new – for individual banks, the banking sector, and financial markets, addressing any unintended consequences as necessary. bis central bankers ’ speeches in this regard, the basel committee ’ s focus is now on ensuring that the calibration of the framework is appropriate. certain aspects of the calibration will be examined and this will involve regular data collection from banks. any adjustments should be based on additional information and rigorous analyses. however, banks ’ data on the crisis are distorted because of the government support schemes. hence, the analysis will need to include both quantitative bank experience and additional qualitative judgement. it is worth emphasising that a number of effects of the framework are indeed intended. for example, with regard to the pool of liquid assets, the rules are meant to promote changes in behaviour and to create incentives to reduce risky liquidity profiles. this can be done, for example, by pushing out the average term of funding or increasing the share of stable funds. in other cases, banks did not price liquidity appropriately throughout the firm, and correcting risk management deficiencies will in turn improve liquidity profiles. in fact, the initial response we have observed in some countries that have already implemented comparable liquidity ratios suggest that these are the types of strategies that are being pursued. effects of basel iii on financial markets since the new regulation will change the behaviour of banks, it will also have wider effects on financial markets. the effects in the transitional phase will be different from the effects in the new steady state. in the transitional phase, adjustments of banks ’ balance sheets to meet the new capital and liquidity standards will affect supply and demand in