and possible implications for basel ii my remarks so far should indicate to you that a number of the lessons for banks and supervisors will be addressed through the improved capital framework. moreover, the framework puts regulators in a better position to reflect future lessons and change. so the first priority is for basel committee members and other jurisdictions to press ahead with this fundamentally important enhancement to capital regulation. the current basel ii framework, however, is not perfect. there are opportunities to reflect some of the new lessons within this more adaptive capital regime. let me share with you some of the issues we have been discussing within the basel committee, as well as some of our current priorities. while we have a rigorous and ambitious work plan with clear timelines to make progress and deliver on these issues, i nevertheless want to caution you that this is still work in progress. i will say a few words about each of basel ii ’ s three pillars. in the first pillar, we are taking a look at the treatment of highly rated securitisation exposures, especially so - called cdos of abs. these securities have recently been the source of the greatest losses across the banking sector and they have an unusual feature : most of the time they perform very well, but when they start experiencing losses, these can build very rapidly, producing a real cliff effect. this explains the unprecedented downgrades we have seen on triple - a super senior tranches, which exceed anything we have seen in traditional corporate bonds. these structured securities are highly correlated with systematic risk. the basel committee will look at whether the capital charges for these types of exposures are calibrated appropriately in relation to their risks and complexity. the committee also is pressing ahead with our work to introduce a credit default risk charge for the trading book. as you know, there has been a rapid growth of less liquid, credit sensitive products in banks ’ trading books. these products include structured credit assets and leveraged lending. the var - based approach is insufficient for these types of exposures and needs to be supplemented with a default risk charge. in addition, it is critical that banks conduct rigorous pillar 2 stress testing of their trading book exposures. they must factor in liquidity horizons and reflect these results in their risk limits, economic capital and concentration management strategies. many structured credit products are tailored for individual investors and have a limited or no secondary market. the basel ii framework has guidelines for what should and should not go into the trading book and these need to be reviewed by banks.

at the same time, high unemployment rates in the euro area and in particular unacceptable high youth unemployment rates suggest the need to spur not only labour supply but also labour demand. there is a need to reduce labour market rigidities which restrict wage differentiation and flexibility. adjustments should be made to employment legislation where it impedes the hiring of younger and older workers in particular. the second priority for reform is to increase competition further. some progress has been made in this regard. for example, several network industries, like telecommunications, are now fully or largely open to competition. a lot remains to be done, however : the extension and deepening of the eu internal market remains a priority in particular as regards further financial market integration, the pursuit of effective competition in the energy market and the implementation of the services directive. let me also briefly mention labour mobility, which is still limited in the euro area. labour mobility is an essential element of the internal market and an important component of adjustment mechanism in a context of monetary union. any barriers to cross - border labour mobility should be removed. following the principle of “ an open market economy with free competition ” is pivotal to fostering long - term economic growth. finally, to fully exploit productivity potential, the labour and product market reforms i just mentioned need to be accompanied by policies that support innovation and technological changes. these include, inter alia, the unlocking of business potential by creating an j. - c. trichet ( 2007 ), “ the need for structural reforms in europe, ” jean monnet lecture to the lisbon council, brussel, 4 june. entrepreneurial - friendly economic environment, measures to support innovation through higher investment in research and development ( r & d ) and policies aimed at improving human capital. in this context, the academic world has an important role to play. to make these measures most effective, they need to be accompanied by efforts to improve the labour force ’ s level of education and expertise. meeting the challenges of innovation and its diffusion as well as ensuring the labour force ’ s employability and flexibility, requires that human capital is continuously adjusted to labour market needs through improved education and training, as well as lifelong learning. the last decades have already brought about an enormous increase in the level of educational attainment. so far, however, investment in human capital in europe is still clearly inadequate for a “ knowledge - intensive ” economy. in 2003, the u. s. annual expenditure on higher education institutions represented 2. 9 % of gdp,