factor, namely the fact that m3 growth was significantly influenced by portfolio decisions of economic agents. initially, the relatively flat yield curve until august 2001 and the persistent decline in stock prices until september seemed to induce many investors to shift parts of their portfolios out of the capital markets and into shorter - term assets, such as those included in m3. subsequently, in the aftermath of the events of 11 september, the exceptional rise in economic and financial uncertainty led to further shifts out of longer - term assets and into low - risk, liquid instruments included in m3. in addition, let me point to the substantial decline in the growth of loans to the private sector in 2001. this contrasting development of money and loans is a feature which clearly distinguishes the monetary situation in 2001 from that in 1999, when the strengthening of m3 growth was accompanied by very strong loan dynamics. hence, our overall assessment was that monetary developments in the euro area in 2001 have so far not indicated risks to price stability. however, this assessment needs to be continuously checked, because what matters in monetary analysis are the medium - term trends. it will therefore be crucial to monitor how m3 develops this year. should a moderation in monetary growth not materialise the implications of monetary developments for risks to price stability may need to be reassessed, in particular in conjunction with a stronger economic recovery in the euro area. on the basis of the available evidence on the fundamental long run stability of money demand in the euro area, which has not been affected by the events of 2001, the analysis of monetary developments over the medium term thus remains crucial for assessing future inflation. it is also worth pointing out that the strong increase in liquidity in 2001 was not specific to the euro area but was a global phenomenon which pointed to the existence of common ( financial market ) factors influencing monetary developments as well as reflecting the stance of monetary policy in the major economies in 2001. turning now to the second pillar, recent data releases have been providing further evidence on the improvement of economic conditions in the euro area. this has in turn increased the likelihood that the economic cycle reached a trough at the end of last year. starting with external developments, there are indications of a gradual firming of economic activity, which should in turn lead to a gradual strengthening of the external demand for euro area products and services. these developments certainly reinforce the expectation of an upturn in economic activity in the euro area in 2002. the recovery should be supported by continuous favourable financing conditions and the significant positive impact of past

- term plans and implementation of the existing procedures. in particular, countries that still have sizeable fiscal imbalances should take advantage of the coming upswing to strengthen their budgetary positions and attain the targets presented in their stability programmes. finally, in order to put the expected recovery on a broad and sustainable basis, it is of the utmost importance that euro area countries now strengthen their efforts to implement comprehensive structural reforms. over the past few years, considerable progress has been made in enhancing the flexibility of the euro area's product and capital markets, as well as in improving the way its labour markets operate. these reforms, together with moderate wage developments, have contributed to the strong employment growth and the considerable reduction in unemployment witnessed in many euro area countries in the last cyclical upswing. however, unemployment is still intolerably high and much more remains to be done. in this context, it is important to make headway with the reform agenda put forward in the lisbon strategy. we should just not accept that the recovery might again be constrained by the unsatisfactory potential growth level. the sound macroeconomic situation which can be expected presents a perfect opportunity to accelerate badly needed reforms. this requires the acceleration of financial market reforms as well as product markets reforms, such as those related to network industries. as regards labour market reforms, it is worth noting that despite the continued high level of unemployment in the euro area significant mismatches between labour supply and demand in a number of areas in euro area countries are still reported. as concluded in a recent report prepared by eurosystem experts, published on 11 march, this provides evidence that despite some improvements, there is still much work to be done in the labour market reform process. with respect to reform on the financial markets, the ecb very much supports the implementation of the procedures suggested in the lamfalussy report on securities regulation. the ecb believes that the procedures suggested in this report will allow for a swift implementation of the priorities set out in the financial services action plan relating to the integration of securities markets. the reform of financial market regulation, also including the other measures foreseen in the action plan, will complement and enhance the effects of reform in the labour and product market.