. as you know, the reference value is an expression of the prominent role of money in the first pillar of the monetary policy strategy of the eurosystem. following its meeting on 2 december 1999, the governing council confirmed the reference value for the growth of the broad monetary aggregate m3 at 4½ % per annum. this decision was taken on the grounds that the main elements which entered the determination of the reference value, namely the definition of price stability, the estimate of the trend growth of real gdp and the trend decline in the income velocity of m3, had basically remained unchanged. the governing council will continue to monitor monetary developments against the reference value on the basis of three - month moving averages of the annual growth rate of m3 as monthly developments might be too volatile. in addition, we also noted that the generous liquidity situation in 1999 will have to be kept in mind when assessing the information content of monetary developments in the future. considering the second pillar of the monetary policy strategy, namely the broadly based assessment of other indicators containing information about the outlook for price stability, most indicators and forecasts have been pointing to increasing upward pressure on consumer price inflation over the medium term. the strong increase in oil prices in 1999 and early 2000 and the depreciation of the exchange rate of the euro in recent months have contributed to upward pressures on import and producer prices. in addition to the direct effects of these pressures on consumer price inflation, there is the risk in the context of the strong cyclical upswing that these developments could, via second - round effects, have lasting effects on consumer price inflation. all three of the interest rate measures taken over the last few months indicate the eurosystem ’ s continued determination to counter the emerging upside risks to price stability in a timely and pre - emptive manner. it is our strong conviction that we can thereby maintain a non - inflationary environment, which is a prerequisite for making the economic upswing in the euro area sustainable. currently, the prospects for strong economic growth in the euro area are very favourable. we are very much satisfied by the fact that economic activity is now expected to grow more strongly than anticipated earlier. in fact, most forecasts suggest that euro area real gdp growth will be above 3 % in 2000 and 2001, reflecting both the favourable external environment and buoyant domestic demand. these expectations have just been underpinned by the first estimate by eurostat of real gdp growth in the fourth quarter of 1999, which indicated that economic activity continued to

conducive to efficient risk sharing and have a greater destabilising potential than equity flows. 11 finally, given the critical need to elevate their growth potential, euro area countries crucially need to promote innovation and the entry of new participants into markets, which can be supported by financial instruments such as venture capital. 12 a more integrated market for equity financing would support rebalancing and growth in euro area economies. what i am suggesting is not that europe should abandon its intermediated model of financing but that it complements it more – in the context of a structural deleveraging of the banking system – with alternative sources of finance. the financing of smes, which will be at the heart of europe ’ s effort to increase its productivity, because they are a source of innovation, can be usefully supported by a more vibrant securitisation market. still, sme financing will continue to crucially rely on bank lending. europe needs a healthy, competitive and prudent banking sector. therefore, banks should continue to adjust their balance sheets and strengthen their capital to recreate a capacity to take risk and lend to companies and households, within and beyond national borders. removing credit risk from the banks ’ balance sheet, as was done at an early stage in the us, can speed up this process – provided that governments are willing and able to take this risk, individually or jointly. let me raise a final point. a better quality of financial integration would also mean providing a framework in which cross - border capital flows go towards their most productive uses. this has not always been the case in the euro area. since the introduction of the euro, we have seen euro area capital flows go from “ healthier ” ( core ) countries to “ weaker ” ( or poorer, peripheral ) countries. this is superficially in line with what economic theory would suggest : capital flows go from richer to poorer countries, where it earns a higher return owing to lower levels of capital per worker. indeed, capital was flowing “ downhill ”, and there is no “ lucas paradox ” in the euro area as there is in the global economy. 13 however, in many instances, capital flows went into the very inappropriate sectors, fuelling asset or housing price bubbles instead of going to more productive uses. it is my hope, at least, that improved financial supervision, in particular supervision with a macro - prudential and systemic focus, together see hausmann, r., and e.