we need even more improvements in terms of higher productivity growth, rising labour force participation and declining structural unemployment. the case for decisive structural reforms is therefore pressing. structural reforms are generally associated with changes in the long - term equilibrium demand and supply conditions of an economy and changes in the relative prices of goods and services. the transition from the pre - reform to the new post - reform equilibrium conditions normally takes time and within this period some resistance and uncertainty may occur. for this reason the implementation of structural reforms requires a strong leadership, a great deal of courage and a tireless explanation activity. it is very important to make it clear to the public that, if governments, parliaments and social partners deliver those reforms, the benefits will be significant. in capital markets, structural reforms should aim at allowing a more effective allocation of savings toward the most rewarding investment opportunities. since the introduction of the euro, the pace of capital market reform has been impressive. this includes policy - induced reform, such as the financial services action plan initiated by the european commission in the spring of 1999 or the development of national legal frameworks governing the issuance of mortgage bonds. reform covers also market - led initiatives, such as the development of electronic trading platforms or consolidation in the clearing and settlement infrastructure. this was possible due to a cohesive and effective interplay of free competition, coordinated action by all market participants and policy enforcement by public authorities. the need for continuation and completion remains. much progress has also been made regarding the integration and level of competition in product markets. substantial barriers to free competition continue however to exist, particularly preventing the integration of services markets and effective competition in network industries. fostering competition in these areas should also contribute to a downward effect on prices. further regulatory reforms should be accompanied by a sustained reduction in state aid - particularly if it constitutes economically questionable ad hoc and sector - specific measures. this will help to smooth the restructuring process in product markets by promoting the entry of new players. in the end, such reforms will enhance innovation and an efficient allocation of resources. and cuts in subsidies will reduce the tax burden. these product market reforms will contribute to prosperity across the euro area and they will help to address what is the largest current economic and social challenge in europe, namely high unemployment and insufficient employment rates. thus far, progress with the implementation of labour market reforms has been uneven in the euro area. in some countries, significant achievements in terms of lower unemployment are already visible. others are lagging behind and uncertainty pre

##vails about future steps. in many countries, it is important to enhance the flexibility of labour contracts and wage - setting to enhance employment growth in a lasting manner. over the second half of the 1990s, efforts made by some euro area countries to improve the functioning of the labour marked appear to have been fruitful in fostering employment growth and promoting a more job - intensive output growth compared to the late 1980s. in particular, labour market reforms implemented in the second half of the 1990s seem to have benefited those groups facing particular challenges when trying to enter the labour market, such as women, the youngest and oldest age groups and the lowest educated. reforms are also needed that allow wages to reflect more strongly regional and sectoral productivity differences. this will make the whole economy more flexible and better able to absorb economic shocks. these measures have to go hand in hand with product market reforms and reforms of the pension and health care system. such reforms are essential to contain expenditures on pensions and health care. they will not only be needed to reduce non - wage labour costs and increase incentives for job creation but also to ensure the sustainability of the social security systems. the surveillance of fiscal policies we have been very bold in europe in setting up a single currency. i remember all the remarks made by american friends during the 90's. they were easy to sum up : “ you put the cart before the horse. you should have first set up a political federation, with a federal government and a federal budget. then you could have introduced a single currency. ” two main arguments were put forward. first, without a federal budget of some significance the policy mix would have been very erratic, depending on the random behaviour of the different national fiscal policies of the member countries of the monetary union. and second, without such a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy of the monetary union. these two economic arguments are perfectly valid and would have been sufficient to discourage the creation of the euro had we not set up a profoundly original concept of national fiscal policy surveillance. it is this concept, the stability and growth pact which guarantees the coherence and the consistency of the european economic and monetary union ( emu ), namely a single currency area without a political federation. on top of these fundamental economic underpinnings a number of other considerations are worth mentioning. in particular, a fiscal policy that is set according to rules, and is lived up