some countries, namely bulgaria, the extent of hyperinflation and currency substitution left little alternative to the authorities but to accept the reality and move to a hard peg in the form of a currency board linked initially to the deutschemark and now to the euro. similar regimes were also imposed on bosnia, after the dayton accord, and kosovo. the euro is an appropriate anchor for an exchangerate - based policy in these countries, as they are closely integrated with the countries of the eurozone. most of their transactions, not only trade - related, but also workers'remittances, official transfers and financial transactions are with countries of the eurozone. a measure of macroeconomic success is the receding level of currency substitution. in 2002, the last year for which we have full data, bank deposits in foreign currencies fell as a proportion of total deposits in all countries in the region, sometimes quite fast in countries with strong performance in the context of monetary or inflation targeting, with only one exception. this is indicative of a growing trust in the domestic currency and the effectiveness of stabilization. it is all the more important that this achievement should not be squandered, and that prudent macroeconomic policies should continue. nonetheless, i would like to warn of possible problems, especially in those countries that have tied their exchange rate to the euro, one way or another. the weakness of the euro until last year undoubtedly helped both their growth performance and their external competitiveness. from now, in a period of strong euro they will have to rely more on domestic productivity gains and structural adjustments to maintain their growth rates. in addition, and as growth takes hold in advanced economies, countries in the region will have to adjust to interest rates higher than their current historically low levels. an area where much remains to be done is the area of developing an efficient and stable financial system. in this respect, the economies in the region lag behind the other transition economies that are due to join the eu next year. the public sector still controls a substantial part of the banking system, and there is an obvious need to continue the efforts to privatize the remaining state - controlled banks. as in most transition economies, state interference has not been a stabilizing factor, quite the opposite. state controlled banks have often lost substantial sums in politically - motivated investments and have contributed to systemic crises in all those countries. as in other transition economies, we can foresee that an increasing number of banks will been taken

confidence that domestic inflation will continue to normalise, effectively " buffering " the pass - through of wages to prices. overall, the disinflation process is proceeding. our latest projections reinforce our confidence that we are getting consistently closer to our inflation target. although the process may be slow and bumpy, these fluctuations should not affect the projected disinflation. economic activity the euro area economy grew by 0. 3 % in the first quarter of 2024, after five quarters of stagnation. 2 / 7 bis - central bankers'speeches incoming information suggests continued growth in the short run, at a somewhat higher pace than previously foreseen. specifically, according to the june projections, economic growth is expected to rise to 0. 9 % in 2024, 1. 4 % in 2025 and 1. 6 % in 2026. nevertheless, the recovery remains fragile. there are several reasons why i am cautious about the growth outlook. first, global developments and geopolitical tensions are weighing on confidence and economic activity. second, monetary policy affects the economy with long and variable lags. the impact of past policy tightening continues to be transmitted strongly to broader financing conditions and the real economy. the restrictive policy stance at a given point in time continues to affect inflation and output about one to two years after that. in this regard, a significant dampening effect on growth and inflation is still in the pipeline from past monetary policy tightening. this explains why credit dynamics remain weak and will remain so for some time to come. i will now turn to our monetary policy response during the last couple of years. 2. monetary policy response in the past few years, we faced an unprecedented series of supply - side shocks – the kind of shocks not easily amenable to monetary policy measures – and we succeeded in bringing inflation down to near our objective within 18 months of the peak inflation, while avoiding putting the economy into a contractionary territory. we raised interest rates to sufficiently high levels to tame inflation without inducing a recession – which was the first arm of our policies – while, at the same time, we adopted a gradual approach to reducing the size of our balance sheet – the second arm of our policy toolbox. our monetary policy response has proved to be pragmatic, flexible and highly effective. as inflation approaches the 2 % target, while economic recovery and credit growth remain weak, we decided that some layers of restriction are no longer appropriate. as you know, at last month's governing