have been reached at the end of last year. coincident and forward - looking indicators increasingly point to improvements in economic conditions. a similar picture is reflected in financial market expectations, especially those embedded in bond yields. the economic fundamentals of the euro area are sound and there are no major imbalances that would require a lengthy process of adjustment. the expectation of a recovery in the euro area in 2002 is furthermore supported by favourable financing conditions and by real disposable income benefiting from past and expected future declines in inflation. there is also increasing confirmation that economic activity outside the euro area is picking up, which should lead to a gradual strengthening of the external demand for euro area products and services. while the strength of the recovery remains uncertain, there are good reasons to expect a return of economic growth to levels in line with potential towards the end of the year. turning to short - term price developments, annual consumer price inflation picked up substantially in january. part of this increase was expected, as it related to base effects stemming from falling energy prices in early 2001 and to higher indirect taxes in some euro area countries. furthermore, the increase reflected a considerable rise in unprocessed food prices due to adverse weather conditions in parts of europe. part of the latter effect seems to have been reversed in the meantime, as preliminary data for february indicate. some increases have also been observed in oil prices and in the rate of growth of services prices in january. while there might have been an impact on specific service categories in january, overall there is no evidence that the euro cash changeover has had a significant upward effect on the average price level in the euro area or that the declining trend in annual inflation rates has been affected recently. in the coming months, the effects of past increases in energy and food prices should gradually subside and annual inflation rates should fall to below 2 %. the recent behaviour of producer prices also points in this direction. beyond that horizon, we expect little upward pressure on prices from aggregate demand and, barring unforeseen developments, inflation rates to be in line with price stability. however, the current favourable outlook for inflation fundamentally rests on the assumption of a continuation of wage moderation. as i already noted last month, there is some cause for concern with regard to ongoing wage negotiations. a continuation of wage moderation in the euro area is crucial not only to foster employment growth but also to support monetary policy in its task to maintain price stability. with regard to fiscal policy in the

that they more accurately reflect changing economic weights in the world economy, and so that they have more legitimacy and effectiveness. • further work will need to be done on the details of some of these reforms, their ultimate test will be the extent to which they genuinely solve current problems and avert future ones. it is important for us to ensure their swift and comprehensive implementation to convince markets of the benefits to come. but the key issue here – in my view – is confidence. what we ultimately need to achieve is to rebuild confidence in the financial system and among market participants. only confidence will bring about the normal functioning of markets, the intermediation process and of all transmission mechanisms. we are now in the middle of a storm, but it ’ s still worth thinking well ahead and envisaging new circumstances and opportunities. remember that when the delegates from the 44 allied nations gathered at the mount washington hotel in bretton woods, new hampshire, in the summer of 1944, the second world war was still underway. yet the conference laid down principles and established institutions that governed the global economy for three decades. many of them are still in place today, more than 60 years later. the difficult phase we are passing through now, while certainly not as cataclysmic as 1944, may well prove to be a watershed. we had the original bretton woods system until 1971. since the turn of the millennium, we have had what some have called a market - led “ bretton woods ii ”. let me ask then : should we move now to a “ bretton woods iii ”, that is, to a new order for the global financial and monetary system? and if so, how? this question requires deep thinking and cannot obviously be resolved in a few minutes. i would like nevertheless to give you some food for thought. one point to consider is that any new bretton woods should combine issues related to trade, finance and macroeconomic policies. the three are closely intertwined, not only in good times but also in bad times. we are seeing a paralysis in world trade, not because of protectionism, as in the 1930s, but because of the absence of trade finance, so essential to commerce in today ’ s world. trade issues are dealt with by the wto, but closer ties need to be established with the imf and the world bank, given that global imbalances have both a trade and a financial dimension. another thought is that in a globalised world all countries tend to