##quilibria. moreover, if the losses in competitiveness are not corrected, domestic and foreign markets for some products may be permanently lost, damaging longer - term growth prospects. within a monetary union, the potential correction mechanism through the exchange rate is no longer available. hence, the adjustment has to occur through domestic costs and prices. if rigidities in product, labour and capital markets hamper such adjustment, the correction may only take place in the form of weaker growth and a loss in employment growth. 4. the role of the single monetary policy and national economic policies differences in price, and more generally, economic developments between euro area countries do not automatically warrant concern. some differences in economic developments across euro area countries may even be seen as an advantage as they would average out and help to smooth cyclical developments at the area - wide level. perfectly synchronous movements would increase the amplitude of cyclical movements in the euro area as a whole. however, a national policy response would be clearly warranted to deal with sizeable, growing and unsustainable divergences. the single monetary policy can only be geared towards the objective of price stability for the euro area as a whole. it is therefore not in a position to influence the dispersion of inflation rates across euro area countries. if action is required, it must be taken through national economic policies. they need to ensure the capability of individual economies to absorb and respond to shocks. the flexibility of national economic policies to deal with country - specific issues is required in all member states of a currency union, but perhaps in particular in the smaller countries. because of sheer size and weight, economic developments in the large member states have less potential to deviate from area - wide averages than those in a small country. moreover, national developments in large member states may have greater spillover effects on other, smaller member states ’ developments. furthermore, small economies, such as ireland, tend to have a higher degree of national openness, which implies that specific responses to divergent economic developments may be less effective and thus should be further - reaching than in the larger economies. as regards structural policy, it is important to implement reforms in the product, labour and capital markets, which are aimed at increasing overall economic flexibility and which would increase the degree of flexibility of national economic policies in reacting to country - specific events and common shocks. this is important for all countries, independent of their cyclical position. policies that support greater wage flexibility, wage disper

private sector and we have witnessed continued strong growth in loans for house purchase. given the strength of m3 growth over the past few years, there is substantially more liquidity in the euro area than is needed to finance non - inflationary growth. this could pose inflationary risks in the future if this excess liquidity is not progressively reduced as a result of reverse portfolio shifts accompanying the recovery. moreover, persistently high excess liquidity and strong credit growth could become a source of unsustainable asset price increases. a sound and credible monetary policy is a necessary condition for sustainable growth and job creation but is not in itself a sufficient condition. other conditions must be met, in particular, sound fiscal policies and appropriate structural reforms. in this respect, in the area of fiscal policy the year 2003 proved disappointing. the average fiscal deficit in the euro area increased from 2. 4 % to 2. 7 %. moreover, the fiscal situation remained of great concern in countries that had already recorded significant imbalances in 2002. the aggregate euro area fiscal deficit - to - gdp ratio is not expected to improve in 2004 and the average debt - to - gdp ratio is expected to further deteriorate. this is a source of concern - all the more so in view of the important challenges for the consolidation of public finances which will have to be faced in the coming years, such as the fiscal burden of an ageing population. last year fiscal policy in the emu faced a number of serious challenges. on 25 november 2003 the eu council decided not to act on the basis of the commission ’ s recommendation and agreed to hold the excessive deficit procedure for the countries concerned in abeyance. the governing council of the ecb has, the very same day, supported the view of the commission. the stability and growth pact is a cornerstone of emu. it is key to providing an economic rationale to a single currency area which has no federal government and to ensuring macroeconomic stability on a sustainable basis. the governing council of the ecb is of the opinion that substantial improvements in the pact ’ s implementation are needed, particularly as regards the preventive arm of the pact. at the same time, it is not in favour of making changes to the text of the treaty or of the regulations which form the basis of the pact and we insist on the importance of preserving the full integrity of the nominal anchor of 3 % in the corrective arm of the pact. i would also stress the vital importance of a reliable and timely