recent developments may suggest that wage costs have not accelerated further in the course of this year. at our last monetary policy meeting on 7 november we discussed extensively whether or not to reduce the key ecb interest rates, in view of the high uncertainty surrounding future economic growth and its implications for medium - term inflationary pressures. summing up, there were elements in favour and against both alternatives. on the one hand, the subdued trends in economic activity and the stronger exchange rate of the euro supported the view that inflationary pressures should decline. on the other hand, the stubbornly persistent rate of inflation excluding the volatile components of energy and food prices as well as monetary and wage trends, argued for caution. overall, on that occasion the view to keep the key ecb interest rates unchanged prevailed. however, we also indicated that we needed to monitor the downside risks to economic growth for their impact on medium term inflationary pressures. since our last meeting, the evidence has strengthened that inflationary pressures are easing somewhat and downside risks to economic growth have not vanished. regarding fiscal policy in the euro area, i would like to reiterate that budgetary discipline is indispensable for the success of emu. fiscal discipline strengthens the conditions for strong sustainable growth conducive to employment. sound fiscal positions also provide scope for dealing with the expected fiscal challenges caused by population ageing. clearly, therefore, sound public finances, as enshrined in the treaty and further developed in the stability and growth pact, are in the interest of all member states. i want to stress that the current fiscal framework strikes the right balance between discipline and flexibility. by prescribing a medium - term objective of budgetary positions close to balance or in surplus, the stability and growth pact guarantees that fiscal policies will preserve the sustainability of public finances while providing sufficient flexibility for automatic fiscal stabilisers to operate. while it is clear that, for many – partly formal – reasons, annual budgetary targets always need to be set in nominal terms, the assessment of fiscal policies naturally must take into account cyclical developments. though the discussion surrounding this issue may, at times, appear confusing, it does not reflect a flaw in the pact as some critics claim. in this context, it is worth recalling that most member states have reached budget positions which are " close to balance or in surplus ". current fiscal problems in other countries have arisen not because the rules are inflexible, but because countries have

eurosystem is organised in a way that ensures the efficient formulation and implementation of a single and coherent monetary policy for the euro area as a whole. at the same time, it draws, to the extent appropriate, on the existing resources and expertise of the national central banks. structural reform needs in the euro area : improving market integration and competition ladies and gentlemen, let me now address economic areas where structural reforms are needed to further enhance the functioning and the economic prospects of the euro area. i should like to start by referring to one of the most important structural differences between the euro area and the us. regarding the degree of regulation, the us is currently more flexible than the euro area. for instance, higher rates of turnover in the us labour market are a signal that employers enjoy greater flexibility in tailoring their staff numbers to production needs. flexibility of factors of production, including labour, facilitates the introduction of new technologies, allowing firms to organise their production processes more efficiently and to improve their competitiveness. moreover, flexibility lowers the adjustment costs associated with economic shocks. the greater market flexibility in the us is connected with a relatively low degree of labour and goods market regulation as compared with the euro area. while important reforms have been introduced in a number of euro area countries, all in all there is still a long way to go in this respect. this emerges quite clearly from a comparison of the costs and procedures associated with the creation of new businesses, to mention just one example. there is a wide diversity in regulatory arrangements across countries and sectors in the euro area. this diversity emerges quite clearly when looking at product markets. whereas the integration of goods markets is relatively advanced, major shortcomings exist with regard to the full integration of service industries. most of the barriers to trade in services appear to be due to national regulations, for example administrative procedures for setting up subsidiaries in other euro area countries. regulatory barriers along these lines reduce competition in services, thus keeping the respective prices above the level that would be expected in a fully integrated market. much of the recent discussion on structural reforms in product markets has focused on regulatory reform in network industries, in particular telecommunications, electricity and gas. following a number of important reforms in the 1990s, market opening in the telecommunications market has made considerable progress, while reforms in other network industries have generally remained more limited. the initiatives in the telecommunications sector show how reforms that succeed in increasing competition in previously sheltered sectors, considerably enhance productivity, lower relative prices and lead to new and better products, thereby