and perceived inflation started to diverge after the introduction of the euro. while this is a feature which should not be ignored, since what consumers decide to spend depends on their perceived real income, it is now important to acknowledge that it was a temporary phenomenon, and that during the last year and half the gap between actual and perceived inflation has narrowed significantly. notwithstanding the many adverse shocks that hit the euro area in the past years, price stability has prevailed in the euro area. the success of the single currency in delivering price stability and stabilizing inflation expectations in the euro area can be explained by the european institutional framework and the principles followed by the european central bank. first, the european central bank is independent and has a clearly defined mandate given by the treaty to pursue price stability. second, the ecb has provided and made public an arithmetical definition of price stability corresponding to inflation rates below and close to 2 %. third, the medium - term orientation and the very nature of our concept of monetary policy contributes to a solid anchoring of medium and long term inflation expectations, in line with our definition of price stability. the best contribution that monetary policy can provide to economic growth is to maintain price stability. price stability ensures the transparency of the relative price mechanism, thus enhancing the efficiency of resource allocation. stable and low inflation supports private consumption via its positive impact on the real value of households ’ income and wealth. price stability reduces the borrowing costs for individuals and firms. as we all know, inflation erodes the purchasing power of the nominal return on long - term loan contracts or bonds. in case of high and uncertain inflation, savers or those who lend their liquid funds would require a higher rate of return from borrowers, in order to compensate for the higher risks related to the uncertainty about future inflation. this inflation risk premium implies that in an economy with high inflation, less investment projects will be profitable. in such circumstances, capital accumulation will be lower than it could have been in a situation of price stability and the potential output growth rate is consequently reduced. the challenge of economic growth let me now turn to some issues which still need to be addressed. the economic and monetary union has secured macroeconomic stability, has promoted financial integration and led to convergence of inflation and interest rates to low levels. the key question that naturally arises is the following : why has economic growth, nonetheless, remained subdued? in my introduction i have already hinted at my answer by referring to the need for completing structural reforms. let me now

few observations on the use of the euro as a parallel currency in some countries in europe. iii. 1. the international private use of the euro the euro is today the second most widely used currency internationally, in capital markets, in foreign exchange market trading and in international trade. in international capital markets, our data for early 2004 show that the share of the euro in international debt securities gradually increased to around 31 %, compared with a share of less than 20 % for the legacy currencies prior to the launch of the euro. 1 by comparison, the share of the us dollar has decreased slightly ( from 47 % in 1999 to 44 % in 2004 ), and that of the japanese yen has also declined ( from 17 % in 1999 to 9 % in 2004 ). what is particularly noteworthy is that the euro, both as an international financing and investment currency, has a strong regional focus. an analysis of the geographical breakdown of the outstanding stock of euro - denominated international debt securities shows that european countries near the euro area account for the largest share of issues of these securities. moreover, the increase in the use of the euro as an investment and financing currency, relative to other currencies, has also been highest among residents of countries neighbouring the euro area. by contrast, borrowers in asia, latin america and the middle east have continued to issue only a small fraction of their international bonds in euro. holdings of euro - denominated debt securities are very small in portfolios held in the united states. they are also small in asia, but growing. it is in the countries neighbouring the euro area, such as the uk, switzerland and non - euro area nordic countries that such holdings are particularly high. the city of london is one of the main financial centres using the euro and corporations often use london - based specialised intermediaries to issue euro - denominated bonds outside the euro area. a third feature of the role of the euro in international capital markets is that it is partly driven by the euro area residents themselves, as investors ( both retail investors and banks ) from the euro area have bought a significant share of euro - denominated bonds issued in international markets. this is especially the case in international debt markets. likewise, a significant share of euro - denominated financial activity in the city of london originates from euro area - owned banks. these hold around 40 % of euro - denominated assets of uk - resident banks. let us now take a closer look at the