creation, because it maintains purchasing power and boosts the confidence of savers and investors. price stability in itself isn ’ t enough, but it is necessary. some people in france criticise you for favouring the fight against inflation, to the detriment of growth … ask the french people what they think! 63 million french, along with everyone else in the euro area – 319 million altogether – ask us to ensure price stability. it ’ s what the opinion polls say. our fellow - citizens have entrusted us with this task by approving the treaty of maastricht. they pay close attention to the european central bank ensuring price stability, which permits the preservation of purchasing power and fosters sustainable growth and employment. the french themselves have been historically very attached to price stability, to monetary stability. it is true of all the great national sensitivities. it ’ s not by chance that the major symbolic figures of right and left – in particular, general de gaulle and pierre mendesfrance – were very attached to monetary stability. so all is well? much progress has been made, but we still have a lot to do in europe, and also in france, as the governor of the banque de france said in his most recent letter. unemployment is still far too high, even if we have the lowest level for 26 years. it ’ s why we are supporting the efforts being made by all the european governments to embark on structural reforms. structural reforms … what does that mean? to put this quite simply, it means making the economy more flexible and more competitive. a flexible economy is an economy which constantly adapts, one which is capable of taking advantage of technological progress, of the opportunities offered by the changes taking place in the global economy. the economies which are more flexible have more growth and more jobs for themselves and their children. in europe today, it ’ s the more flexible economies which have achieved full employment. you must be pleased to see new eu countries wanting to join the euro? it ’ s true, being numerous in the euro area allows us to have a large continental economy that is stable and prosperous. our responsibility, i. e. that of the executive board and the governing council of the ecb, is to give the best possible monetary policy to our vast single economy with a single currency, which is comparable with the united states. cyprus and malta will join us as from 1 january 2008. the euro area will have then 320 million inhabitants and 15 countries.

it unwinds? to help frame the discussion, i will focus on two different strategies that have been proposed for dealing with market bubbles. the first approach - - which i will label the conventional strategy - - calls for central banks to focus exclusively on the stability of prices and economic activity over the next several years. under this policy, a central bank responds to stock prices, home values, and other asset prices only insofar as they have implications for future output and inflation over the medium term. importantly, the strategy eschews any attempt to influence the speculative component of asset prices, treating any perceived mis - pricing as, rightly or wrongly, an essentially exogenous process. following this strategy does not imply that policymakers ignore the expected future evolution of speculative activity. if policymakers suspect that a bubble is likely, say, to expand for a time before collapsing, the implications of that possibility for future output and inflation need to be folded into their deliberations. practically speaking, however, i view our ability to act on such suspicions as limited given how little we know about the dynamics of speculative episodes. despite its approach to perceived speculative activity, the conventional strategy does recognize that monetary policy has an important influence on asset prices - - indeed, this influence is at the heart of the transmission of policy decisions to real activity and inflation. it occurs through standard arbitrage channels, such as the link between interest rates and the discount factor used to value expected future earnings. david reifschneider, of the federal reserve board's staff, contributed substantially to the preparation of these remarks. the second strategy, by comparison, is more activist and attempts to damp speculative activity directly. it was described at length in " asset price bubbles and monetary policy, " an article published by the ecb last year. i quote from the article : " this approach amounts to a cautious policy of'leaning against the wind'of an incipient bubble. the central bank would adopt a somewhat tighter policy stance in the face of an inflating asset market than it would otherwise allow if confronted with a similar macroeconomic outlook under more normal market conditions.... it would thus possibly tolerate a certain deviation from its price stability objective in the shorter term in exchange for enhanced prospects of preserving price and economic stability in the future. " 2 i am labeling this second approach extra action, as it calls for steps that would not be taken in ordinary circumstances. 3 compared with the first approach, the extra