institutions have come under severe pressure. the financial authorities – both in europe and in other parts of the world – reacted promptly. central banks, including prominently – and from the very start of the turmoil – the ecb, provided short - term liquidity support to prevent contagion. a number of the central banks ’ actions were coordinated internationally. regulators gave priority to comprehensive policy responses, addressing the more fundamental weaknesses. coordinated guidelines were put forward at the european and international level by the financial stability forum, the eurogroup and the european council, in particular, and were reflected in the declaration of the g20 summit. this bears witness to the importance of measures to be applied consistently in all countries. a global financial system requires a globally coordinated response, and the official sector has been providing just such a response. looking ahead, we should correct the substantial flaws in the financial system that have now become evident. of course, we should not throw the baby out with the bath water by discarding the market economy setup that underlies the system. it is the only setup that has proved able over time and globally to deliver sustained prosperity, and it has no equal in overall efficiency. but our basic aim should be to improve very significantly the resilience of the financial system : the fragility that has become apparent since august 2007 and more acute since mid - september last year is not acceptable. we have to draw lessons from the present situation without any complacency. to be specific in terms of avenues for reform, i would like to highlight three areas where change is particularly needed : 1 ) short - termism, 2 ) pro - cyclicality and 3 ) transparency. i believe that shortcomings in these areas were instrumental in creating the conditions for this crisis and amplifying its severity. 1. first, among financial market participants ( traders, managers, risk committees and boards of directors alike ) for a long time there has been an excessive focus on short - term profits to the detriment of longer - term business performance. this has resulted in excessive risk - taking and, particularly, an underestimation of low probability risks stemming from excessive leverage and concentration. we now need to create more balanced and forward - looking incentive frameworks for management compensation and more effective internal risk measurement and control systems that take into account not only near - term profitability but also sustainability and durable financial strength. this is an area where improvement will depend crucially on private decisions, in addition to public action.

- 2003. of course, it could be argued that the present external imbalance is, to a certain extent,'an attendant phenomenon of success '. fdi inflows having been strong through the entire transition period, reinvested earnings and dividend payments have become increasingly important among the factors determining the current account balance in estonia. the current account figures for the second quarter of this year offer a good illustration for this phenomenon - the primary current account deficit was 7 % of the gdp - more than 6 pp below the actual deficit. at the present time foreign investors are taking into account the perspective of estonia's eu membership within the near future, the optimistic growth forecasts and continuing increase of living standards. due to favourable financing conditions, total investment activity has recently been the highest since the beginning of the transition period - during the first quarter of 2003 investments together with stock building accounted for 38 % of the gdp in estonia. at the same time, a number of small and medium - size enterprises are bringing their production plants in line with eu requirements. and of course, borrowing at the present low interest rates is very attractive to private individuals. but despite all the exceptional one - off factors behind the present high external deficit figures, we must not close our eyes to the fact that the level is high. and reducing the imbalances - with all the attendant stress on increased public and private savings - is presently one of the main priorities for estonia. it must be stressed, in this context, however, that one indicator taken alone - even if it were an indication of possibly unfavourable developments - would not give an adequate picture of the relative health of an economy. that is certainly true of estonia where the level of wages, inflation figures and the changes in productivity would indicate that economic stability is not affected as seriously as indicated by the current account figures taken alone. for instance, the cpi growth in estonia and in the euro area was almost equal in the first half of 2003. according to the present estimates, estonian cpi growth will remain at 1. 5 % in 2003. it could be said that recent inflation developments have been most encouraging. although some temporary effects and weak external pressures have recently helped to ease the inflation pressures, the role of the domestic factors contributing to a steady disinflation process should not be underestimated. but at the same time it should not be forgotten that a gradual increase of price level is an inevitable result of real convergence under a fixed rate of exchange. it