jean - claude trichet : a stability - oriented monetary policy as a necessary condition for long term growth speech by mr jean - claude trichet, president of the european central bank, at the unice competitiveness day, brussels, 9 december 2004. * * * ladies and gentlemen, it is a pleasure for me today to address such a distinguished audience, which best represents the european entrepreneurial capacity and dynamism. today i would like to discuss first the general role of policy institutions in a developed market economy. i shall then dwell more specifically on how the conduct of monetary and fiscal policy in the euro area contributes to foster high and sustainable output growth and job creation. finally, i shall stress the importance of structural reforms in labour and product markets in ensuring that our economy is endowed with the degree of flexibility that is needed for firms and workers to be able to withstand successfully the challenges that the contemporaneous, highly interrelated world economy poses to us. the determinants of sustainable long term growth the determination of the factors that increase the individuals ’ standard of living is the main issue that scholars have analysed since economics was born as a modern science more than 250 years ago. the evolution of the economic theory has greatly furthered and deepened our understanding of this issue. nevertheless, one core conclusion remains today as important as it was in the late eighteenth century : the amount of goods and services produced in any given economy grows at its highest possible rate when the rules of market economies are applied. we have learned that this prescription cannot possibly be translated into a pure laissez - faire doctrine, because when the production and the exchange of goods and services is carried out without a proper legal and institutional framework the potential of the economy would not be fully exploited. for this reason, societies need to equip themselves with the right framework, which enhances the collective welfare by clearly defining and ensuring property rights and ensuring the efficient supply of public goods. this means in particular that economic policy must ensure that individuals have the necessary incentive to earn their income by working and producing goods and services which other individuals need. it also means that enterprises must take their decisions on the basis of market signals without relying on subsidies or being protected from competition. this will foster the accumulation of human and physical capital and a high level of employment, which are the determinants of long term growth. to fulfil this objective, economic policy must create and maintain a “ stable ” macroeconomic environment, ensure an appropriate

consumption, saving and investment, they should also not have impediments in the form of unnecessary and excessive regulations. a sound monetary and fiscal policy framework has to be complemented by structural policies that make the economy more flexible and dynamic. since march 2000, when the european council launched the lisbon agenda, european national governments, parliaments and social partners have become increasingly aware of the importance of implementing a substantial, courageous and far - reaching agenda of structural reforms. the ecb, from its side, fully endorses the lisbon agenda and shares its objectives. we also agree with the main conclusion of the high level group chaired by wim kok that - in preparation of the mid - term review of the lisbon strategy - has stressed the advantages of sharpening the focus on the key issues in order to revamp the structural reform process in europe. indeed, in the last decade, euro area countries have made some tangible progress with their structural reform programs. competition in product markets due to, for example, a lower level of state aid and de - regulatory measures has increased, especially in network industries. this resulted in significant downward price effects in some sectors like telecommunication. the ecb is supporting strongly governments that are courageously embarking on reforms and does not underestimate the difficulty to implement them. in particular it has proven to be more difficult than previously expected for european governments and social partners to implement labour market reforms that could strengthen the positive employment trends recorded in the eu in the second half of the 1990s. breaking the reform deadlock is of the utmost importance, also in light of growing role played by new economies in the international market place that exposes european firms to new and challenging competitive pressures. it is not my intention today to provide suggestions to government, parliaments and social partners about specific policy actions, but it is clear to me that in the area of labour market reform, increasing flexibility and suppleness with a view to maximize job creation and to augment the capacity of outsiders, like unskilled youth, to enter the job market is of the essence. in another domain there is a number of countries where the lengthening of retirement age, allowing workers to work longer hours per week and the reduction of non - wage costs of labour - like labour income taxation and social security contributions - are necessary to increase labour supply and demand, thus raising the productive capacity of the economy. recent events involving a number of important euro area companies demonstrate that social partners are aware of the collective benefits induced