cannot be ignored. the so - called european model has come under increasing pressure from demographic factors. further policy changes towards stimulating labour supply are inevitable if living standards and social cohesion are to be preserved. unlike social preferences and rigidities, macroeconomic policies m ust not be seen as an explanation of the weaker growth in the euro area. first of all this holds true for monetary policy. as you know, the treaty of maastricht unambiguously provides that maintaining price stability constitutes the primary objective of the european central bank. according to the definition of the ecb which was clarified about a year ago and which aims to create a stable anchor for price expectations, price stability implies an annual rise in the harmonised index of consumer price for the euro area below but close to 2 p. c. this objective must be maintained in the medium term. central bankers can not prevent external shocks, such as a rise of commodity prices on the international markets, from resulting in a temporary rise of inflation. but, they have to preclude second - round effects. in its conduct of monetary policy, the ecb has already gained a high degree of credibility with market participants as is shown by moderate inflation expectations. these expectations remaining in line with its target the ecb was able to cut its key interest rate to historically very low levels ( 2 p. c. in nominal terms and actually zero in real terms ). monetary policy thus made its own contribution towards stabilising economic activity in the euro area. ensuring price stability, as well as confidence in the euro, is the best contribution to higher and sustainable growth the ecb can make because it also allows for the advantage of low medium and long term market rates which in many european countries are still more important for the financing of investments by enterprises, households and government. in the fiscal sphere, almost all the governments in the euro zone allowed the automatic stabilisers to take full effect during the recent slowdown, and that effect was often reinforced by discretionary measures. between 2000 and 2003, the budgetary deficit of general government in the euro area has grown from 0. 9 p. c. of gdp to 2. 7 p. c. the deficits of some countries have even exceeded the threshold of 3 p. c. fiscal policy has thus not been an impediment to recovery. one might however wonder whether the stimulation of the economy intended by the fiscal easing in many countries was not eroded by the adverse impact which such a relaxation

than the global private entities. the burden of such an asymmetric adjustment means that there is a need to institute domestic mechanisms that could focus on the aspect of financial stability on an on - going basis. as institutions traditionally mandated with the task of price stability, central banks became the natural choice for governments to be entrusted with oversight of financial stability. given that financial stability has become a paramount focus of central banks, the key question therefore arises is : how are central banks responding to the challenge? interestingly, new legislations explicitly provide mandates for financial stability ; illustratively, hungary passed such legislation in 2001, the netherlands in 1993, spain in 1994 and the uk in 1997. so, the question is why have the central banks become interested in financial stability? central banks are clearly responsible for issue of currency, maintaining its value as a means of exchange and unit of account. they are also responsible for maintaining the efficiency and integrity of payment systems. ultimately, they are the lenders of last resort. notwithstanding the complexity involved, evidence suggests that involvement in financial stability can be broadly categorised into five types of activities. being a key fulcrum of the policy apparatus responsible for financial stability, central banks might be involved in several of these tasks. first, oversight of the financial infrastructure : this involves the operation as well as oversight of the payments and settlement systems and securities clearing system. it might also involve oversight of financial disclosures, market conduct and the like. it is important to note that all at the markets need the payment system, including the capital market. second, regulation and supervision of financial entities : this involves the formulation of prudential guidelines ( capital adequacy and reserve requirements, provisioning norms, risk management standards ), the monitoring of compliance with those rules ( on - site inspection and off - site surveillance ) and the imposition of sanctions in case of non - compliance. third, safety net provisions : this involves decisions to restructure troubled banks as well as ‘ honest brokering ’. it also involves the operation of financial safety net in the form of deposit insurance. fourth, liquidity : the response to a crisis may necessitate judicious use of the emergency liquidity assistance facilities in order to avoid disruptions from disorderly failures and to contain contagious strain. only central banks can inject liquidity. fifth, market surveillance : central banks are often involved in the regulation and surveillance of markets. the three markets that are primarily the