stability, which is one of the themes for our forthcoming discussions, has always been an important item on the central bank policy agenda. a well - known swedish economist, knut wiksell, was a clear exponent of the idea in the late nineteenth century. as it happens, he addressed an audience on the subject here in stockholm a hundred years ago almost to the day, namely on 14 april 1898. in one of his books he wrote : “ if prices rise, the rate of interest is to be raised ; and if prices fall, the rate of interest is to be lowered ; and the rate of interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or the other. ” just over three decades after his address in stockholm, sweden had to leave the gold standard in september 1931. the objective of monetary policy was declared to be to use “ every available means to maintain the swedish krona ’ s domestic purchasing power ”. in this way the riksbank was the first central bank to declare openly that its monetary policy norm was price stabilisation. notwithstanding this long tradition, after inflation ’ s rising trend in the post - war era, swedish economic policy ’ s reorientation toward price stability did not begin until the late 1980s and early 1990s. that was a decade or so after such realignment had been initiated in other countries. by then, sweden had experienced twenty years of inflation that averaged 8 per cent a year. that was the longest inflationary period since the early nineteenth century. in contrast, in the one hundred and forty years from 1830 to 1970, inflation in sweden had averaged an annual rate of 2 per cent. so one can say that in the present decade we have been re - establishing our roots. sweden ’ s policy realignment in the early 1990s was, however, more painful than anyone could have foreseen. one conceivable explanation is that, having waited longer than other countries, the road back to price stability was more difficult for us. there were also a number of exceptional events along the way. what was perhaps the worst bank crisis of the century erupted in the wake of the 1980s ’ bubble economy. exchange rate turmoil was such that, during some dramatic days, the instrumental rate was hiked to 500 per cent. in the early 1990s the budget deficit grew to be the largest in the industrialised world. there are many similarities, as well as some differences, between the

lucas papademos : european central bank ’ s annual report 2007 introductory statement by mr lucas papademos, vice - president of the european central bank, to the committee on economic and monetary affairs of the european parliament, strasbourg, 21 april 2008. * * * madam chair, honourable members of the committee on economic and monetary affairs, it is a great pleasure and privilege to present to you today the ecb ’ s annual report 2007. this presentation is a key pillar of the ecb ’ s accountability relationship with the european parliament. in my introductory statement, i will first review economic and monetary developments in 2007, summarise our current assessment of the macroeconomic outlook, and explain our monetary policy decisions and operations. i will then briefly address fiscal policies and structural reforms. finally, i will focus on financial market conditions and prospects and will conclude by discussing envisaged policy measures aimed at restoring confidence and strengthening the resilience of the financial system. before doing so, i would like to highlight an important event : the third enlargement of the euro area with the adoption of the euro by cyprus and malta on 1 january 2008. thanks to the meticulous preparations of all parties concerned, the changeover to the euro was very smooth and efficient in both countries. the single currency was received with great enthusiasm by the cypriot and maltese people and we warmly welcome them to the euro area. economic and monetary developments 2007 was a very good year for the euro area in terms of economic activity. real gdp grew by 2. 7 %, mainly driven by domestic demand. euro area exports also benefited from strong, albeit moderating, global growth. however, in the second half of 2007, the outlook for economic activity was clouded by unusually high uncertainty, stemming from the difficulty of ascertaining the potential impact on the real economy of the financial turmoil that erupted in august 2007. the balance of risks to the growth outlook tilted to the downside. with regard to inflation, the year 2007 was characterised by a number of challenges. in the euro area, average annual hicp inflation last year was 2. 1 %, that is, slightly above the ecb ’ s definition of price stability. however, in the last quarter of the year, annual inflation rates rose sharply, reaching a peak of 3. 1 %, driven largely by substantial increases in oil and food prices. notwithstanding these price shocks, wage growth remained moderate and medium to longer - term inflation expectations firmly anchored at levels consistent with price stability