banking sectors. consolidation has also affected stock markets. for example, the three baltic stock markets recently merged with the scandinavian omx markets and use a common trading platform. finally, it is clear that in several new member states, further improvements in the legal frameworks and market infrastructures may be needed in order to establish more transparent and efficient financial markets. this also applies to the greater transparency of counterparties in financial transactions, which would undoubtedly promote the further integration of these countries ’ financial markets with those in the euro area. from this overview, it is evident that, despite the significant progress made in previous years, the convergence process of the financial structures of the new eu member states with those of the euro area is not yet complete. i will come back to this issue – and how we see the road ahead for the new member states – later. at this stage, allow me to address two issues that are very topical for both the latvian economy and several other new member states : strong credit growth and rapidly rising house prices. iii. credit growth let me start, on the question of credit markets, by pointing to three characteristic facts. first, dynamic credit growth to the private sector can be observed in a number of the new eu member states, well above the average rate in the euro area. the growth of credit to the private sector has been especially strong in the baltic countries and hungary, where it has reached annual rates of between 30 % and 50 % in recent years. in other countries, such as the czech republic and slovakia, the rate of credit growth to the private sector has been more moderate, but has picked up recently, while in poland it has slowed down considerably, following peaks reached around the turn of the decade. second, credit - to - gdp ratios in central and eastern european countries still remain well below the euro area level. third, credit expansion has, in most of these countries, been financed by both domestic and external sources. in the early stages of credit expansion, a rise in domestic savings, partly reflecting increased confidence in banking systems and the overall financial deepening of these economies, was a particularly important source of banks ’ financing. subsequently, as interest rates have declined and the propensity to consume has increased, banks have progressively relied more on external sources. looking at the sectoral breakdown of credit growth, it is fairly clear that the main driver of credit dynamics has been loans to households – largely in the form of mortgage lending. intense competition in this market segment has encouraged banks

, and the flow of loans in recent months has been strong. the monetary analysis has helped to support the necessary medium - term orientation of monetary policy in the face of the ongoing financial turmoil. from this perspective, the monetary analysis points to upside risks to price stability at longer horizons. moreover, a thorough assessment of the monetary counterparts suggests that, as yet, the availability of bank credit to households and non - financial corporations has not been significantly affected by the turmoil. to sum up, a cross - check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment that upside risks to price stability prevail over the medium term, in a context of very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now. in fact, we noted that risks to price stability over the medium term have increased further. the economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real gdp growth. against this background, the governing council is monitoring very closely all developments. it is in a state of heightened alertness. by acting in a firm and timely manner, we will prevent second - round effects and ensure that risks to price stability over the medium term do not materialise. securing a firm anchoring of medium and longterm inflation expectations in line with price stability is of the essence. regarding fiscal policy, the governing council welcomes the spring 2008 orientations for euro area fiscal policies agreed by the eurogroup ministers on 13 may 2008. many euro area governments still need to implement much more ambitious policies to ensure that their country - specific medium - term budgetary objectives are attained by 2010 at the latest, as agreed in berlin in april 2007. achieving and maintaining sound structural fiscal positions is imperative to create scope for the free working of automatic stabilisers in all euro area countries and will help to prepare for the budgetary costs of population ageing. the steady pursuit of prudent and efficient fiscal policies would also help to limit current inflationary pressures and would increase potential growth and employment. as regards structural reforms, the governing council reiterates its full support for all efforts to enhance competition, increase productivity and foster market flexibility. against the background of a marked increase in international food commodity prices, removing impediments to competition at the various stages of the food supply chain in the retail and distribution sectors would benefit european consumers through lower prices. the ongoing “ health check ” of the eu common