some critics say that the eu and the ecb are not able to control these imbalances between the regions ; it would seem that the eu economy as a whole has been strengthened as a result of the free movement of labour between regions. is that correct? speaking only of the euro area, let me give you some figures for the number of jobs created in the eight years since the introduction of the euro ; about 12 million jobs were created in this period, which is slightly more than the number created in the same period in the united states. if we look at the figure for jobs created in the eight years prior to the introduction of the euro, it is less than three million. i am not saying that this was solely due to the introduction of the euro ; it is also evidence that the economic reforms within the eu are progressing steadily. that is precisely why we are in full support of the programme of structural reforms, based on the lisbon programme which was adopted in march 2003, that are aimed at achieving economic growth and job creation. the european economy is currently performing well. is this down to the economic cycle or is it something more sustainable resulting from the structural reforms? that is an extremely important question. i would say that in the current situation europe is benefiting greatly from the cyclical effect of the brisk expansion of the global economy, but the effects of the start of the structural reforms, which are clear from the job creation figures i touched on earlier, cannot be ignored. the creation of jobs is a great achievement and it is a result of the boost to internal trade given by monetary union. we still have work to do on improving labour productivity. the ecb considers the current growth potential of the eu to be around 2. 25 %, but this could be increased through improved labour productivity, which is precisely why the agenda of structural reforms embedded in the lisbon programme must be implemented. what do you think are the reasons that labour productivity has failed to improve? are there any particular obstacles to overcome? could it be that the diversity is actually working against reform? no, no, that is definitely not the case. it is simply that we have to continue to reform all our markets – the goods, services, labour and financial markets – to make them more flexible. one problem that i can cite are the large discrepancies between the different sectors in the economy. the reforms are ongoing, but – while productivity in the manufacturing industry has risen rapidly thanks to the introduction of information technology, etc

and how world events are shaping the direction of the australian economy, then it is in a position to evaluate the multitude of statistics about the economy that each day brings forth. they essentially indicate whether the ‘ big picture ’ view of how the economy is evolving is on track or not. mainly they show whether events are happening quicker or slower than expected, but in extremis, they could mean that the overall assessment was incorrect. there is so much semi - random variability in economic statistics that, unless the underlying processes are known, the statistics alone are unlikely to be able to show where the economy is heading ; this is particularly the case if too much emphasis is placed on one month ’ s statistics. the current situation i have spoken on several occasions about the risks that can develop as an economic expansion lengthens and economic imbalances emerge. with the australian economy in the fourteenth year of expansion, we have naturally paid particular attention to these imbalances. the one that was most prominent until recently was the sharp increase in house prices and household debt. more recently, it has been the emergence of capacity constraints in some parts of the economy. no - one should be surprised by this development ; it would be remarkable for any economy in the fourteenth year of an expansion if this were not to happen. finally, we have seen the australian current account deficit as a per cent of gdp move relatively quickly from its smallest level in twenty years to its largest. these developments are all related, as i hope to show, but i will start my story as usual from the perspective of the world economy. after the mild recession of 2001, the world economy moved into an expansionary phase, which has been robust overall, but has been marked by very disparate growth rates among major regions. two regions in particular - japan and europe - have made only minimal contributions to the expansion which has been led by the united states, china and other east asian countries. a notable feature this time is that the rest of the world, which tends to be overlooked in most assessments, has also grown strongly. by the rest of the world, i mean latin america, india, the middle east, eastern europe, former soviet union, etc. overall, despite these regional divergences, the world economy has expanded at above - average rates over the past few years providing a very favourable backdrop to the australian economy. consensus forecasts for 2005 and 2006 are also for above - trend growth, although somewhat lower than last year. a particular feature