, including the ecb, are addressing their financial stability mandates in part through the periodic issuing of a public report. financial efficiency can be defined as a condition in which the resources available in a financial system are allocated to the most valuable investment opportunities, at the lowest possible cost. in an efficient financial system, markets are competitive, information is accessible and widely disseminated, and the conflicts between borrowers and lenders that arise from agency problems are effectively dealt with through market contracts. 1 ] in this way, financial efficiency contributes to minimising the wedge between borrowing and lending rates, as well as the dispersion of risk - adjusted borrowing costs across individuals. 2 from this definition, it is obvious that reducing regulatory entry costs in financial markets and, more generally, enhancing competition, transparency, innovation and financial market integration will enhance financial efficiency. while financial stability and financial efficiency are different concepts, they are interrelated. obviously, a high degree of financial efficiency, in which resources are allocated efficiently from savers to investors and where risks are appropriately priced and distributed, normally contributes to financial stability. at the same time, stability is a precondition for a smooth and efficient functioning of the financial system. however, while financial stability and financial efficiency are in principle complementary, history has shown that there are also circumstances in which attempts to enhance the efficiency of the financial system may undermine financial stability at least in the short term. the converse may also be true, but i will address these issues in more detail later on. the ecb has a special interest in a stable and efficient financial system : first, because the treaty explicitly requires the ecb, without prejudice to the overriding goal of price stability, to contribute to financial stability and efficiency. the ecb is required to do this by ( i ) promoting the smooth operation of payment systems ( art. 105. 2 ) ; ( ii ) by contributing to the smooth conduct of policies pursued by the competent authorities relating to prudential supervision of credit institutions and the stability of the financial system ( art. 105. 5 ) ; and ( iii ) by acting in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources ( art. 105. 1 ) ; and second, because there are close complementarities between price stability on the one hand, and financial efficiency and financial stability on the other. for these reasons, the ecb devotes significant resources to studying financial market developments and the conditions for financial

the early part of the year, some strengthening appears to be taking place during the spring. looking ahead, the governing council expects real gdp to expand at a moderate pace. the ongoing recovery at the global level, and its impact on the demand for euro area exports, should provide support to the euro area economy. at the same time, the financial crisis is expected to have a dampening effect on economic growth given the ongoing process of balance sheet adjustment in various sectors and the expectation of low capacity utilisation and weak labour market prospects. the governing council continues to view the risks to this outlook as broadly balanced, in an environment of high uncertainty. on the upside, the global economy and foreign trade may recover more strongly than projected and confidence may improve more than expected, with the result that the recovery becomes self - sustained. on the downside, concerns remain relating to renewed tensions in some financial market segments. in addition, a stronger or more protracted than expected negative feedback loop between the real economy and the financial sector, renewed increases in oil and other commodity prices, and the intensification of protectionist pressures, as well as the possibility of a disorderly correction of global imbalances, may weigh on the downside. with regard to price developments, euro area annual hicp inflation was 1. 5 % in april 2010, according to eurostat ’ s flash estimate, after 1. 4 % in march. this is somewhat higher than expected a few months ago and appears to be related, in particular, to upward pressure in energy prices. looking ahead, global inflationary pressures may increase, driven mainly by price developments in commodity markets and in fast - growing economic regions of the world, while euro area domestic price pressures are still expected to remain contained. as a result, overall inflation rates are expected to be moderate over the policy - relevant horizon. inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. in the near term, given the developments in energy prices, risks to earlier projections for hicp inflation are tilted somewhat towards the upside, while risks to price stability over the medium term are viewed as still remaining broadly balanced. upside risks over the medium term relate, in particular, to the evolution of commodity prices. furthermore, increases in indirect taxation and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years.