area ’ s financial sector. taking the context of deeply malfunctioning credit markets, our recent decision on mediumterm liquidity has been central in banks returning to play their vital role in the real economy. banks account for over two thirds of external financing of firms in the euro area. banks are especially important for small and medium - sized enterprises, which account for nearly three quarters of employment in the private sector. as many as 800 banks participated in our last operation. they cover virtually the entire euro area. many of the banks are small, regional institutions. i cannot even mention their location, the towns, the villages where these banks are, because often they would be the only bank in town so they could be identified. this tells us one thing – that the money is now closer to households and the small and medium - sized enterprises than it was before. bis central bankers ’ speeches we are continuously alert to the risk of inflation, but this risk is not materialising at the present time. moreover, inflation expectations remain firmly anchored in line with price stability. all the necessary tools to address potential upside risks to medium - term price stability are fully available. over the past 13 years, the ecb has achieved one of the best records of price stability in european history. we are committed to maintaining that record. the recent signs of stabilisation allow us all to face the medium - term challenges for the euro area with a degree of confidence. all policy - makers should take advantage of this position to continue their reforms with confidence. competitiveness : the external and internal dimensions let me turn now to the theme of this conference and explain the term competitiveness. competitiveness, broadly defined, is firmly grounded in a notion of relative productivity : a competitive economy is one that provides the institutional environment necessary to foster the development of highly productive firms. such firms have the capacity to sell their goods and services abroad easily and profitably, contributing to longer - term economic growth and employment and, ultimately, to the welfare of citizens. but competitiveness is not only international price competitiveness. competitiveness is also related more broadly to a country ’ s external performance. analysis of this broader concept of competitiveness includes indicators of export growth, market shares and current account balances. prices, costs and wages are important factors in determining the ability of firms to compete in international markets. but for firms – and thus countries – to adjust successfully to the big changes implied by globalisation, other factors have become increasingly important. these

close to balance, compared with sustained deficits in the us and sustained surpluses in japan. of course, remaining competitive is a continuous challenge. over the past two decades, as low - cost competitors have emerged elsewhere in the world, the euro area – like other advanced economies – has recorded some decline in export market shares. these losses partly reflect the mechanical effect of the new entrants. nevertheless, the euro area does need to adjust the range of goods, services, sectors and industries in which it specialises. euro area countries have changed their specialisation over the last two decades, but not all did so to the same extent. as a consequence, the specialisation of the euro area as a whole has not changed much. we could have expected that the euro area would have shifted more towards higher quality products and products that are more skill - intensive and capital - intensive. the fact that there has not been more progress overall might reflect structural rigidities that constrain firms ’ ability to adjust rapidly and to make substantial changes in their specialisation – particularly towards high - technology products. in particular, rigidities in the product and labour markets make it difficult for firms to adjust costs and prices to changing conditions. the ability of countries to adopt the appropriate specialisation may also be limited by structural issues related to the quality of education and the incentives for innovation. internal competitiveness the general picture for the external competitiveness of the euro area is positive. but this general picture does not necessarily hold for each member of the euro area. overall, looking at competitiveness within the euro area, there have been substantial differences across countries. indeed, the strains in some sovereign debt markets have been compounded by the severe competitiveness differentials that have emerged within the euro area. a convenient way to identify competitiveness differentials is simply to look at the current account balances of each country. current account imbalances could be justified for any country, including those participating in a monetary union, and they do not necessarily reflect a loss of competitiveness. but increasingly, larger current account deficits have resulted from significant losses of national competitiveness, signalling domestic macroeconomic imbalances and deeper structural bis central bankers ’ speeches problems. these losses of competitiveness limit the country ’ s growth potential and hinder its participation in the global trade integration. against this background, rather than financing productive investment in the tradable sector and fostering export performance, capital inflows in some countries with excessive current account deficits