3 % decline 2 / 7 bis central bankers'speeches in total assets over the period and the extensive restructuring efforts that have taken place in many banks. third, regarding the legacy of npls we first need to acknowledge that significant progress has been made. on average, npl stocks are being reduced fairly quickly, particularly in countries with the highest levels of npls. still, the burden remains heavy for a number of banks. reduction plans for these banks look ambitious for the coming years, but it is how they are implemented that will make the difference. at the same time, the ongoing policy initiatives designed to address this issue and prevent a similar build - up in the future are essential. if these structural challenges are only resolved slowly, the outlook for the euro area banking sector will hinge on cyclical developments and their impact on banks ’ operational environment. it is thus interesting to look at the broader financial stability challenges for banks over the next couple of years. despite some positive recent trends, the risk environment has become more challenging for the euro area financial system in many ways. on the positive side, the growing economy and the ever more resilient banking sector are supporting financial stability. this is partly why the financial system has recently proved resilient to volatility, and why contagion across countries and markets has remained limited. but these developments need to be put into the context of the continuing search for yield in the markets, rising trade protectionism, and political and policy uncertainty, which increase risks to financial stability. taking these factors together, the euro area financial sector is faced with risks, which can be classified in three categories. first, the factors that are related to the past, in other words, the legacy of the crisis, include a still - significant private and public debt overhang. and as i just said, the banking sector is still dealing with the challenges posed by the quality of its legacy assets. second, the current expansion of the us is now significantly longer than historical norms and the second longest in us modern history. looking ahead, a down - turn in the us macro - financial cycle could trigger a correction in markets in particular for riskier asset classes. furthermore, tensions have grown in emerging market economies on the back of a stronger us dollar and increased trade frictions. these developments may undermine global growth prospects and ultimately lead to abrupt increases in risk premia. so far, however, we continue to observe high risk - taking by market participants searching for yield in the low

lucas papademos : european central bank ’ s annual report 2007 introductory statement by mr lucas papademos, vice - president of the european central bank, to the committee on economic and monetary affairs of the european parliament, strasbourg, 21 april 2008. * * * madam chair, honourable members of the committee on economic and monetary affairs, it is a great pleasure and privilege to present to you today the ecb ’ s annual report 2007. this presentation is a key pillar of the ecb ’ s accountability relationship with the european parliament. in my introductory statement, i will first review economic and monetary developments in 2007, summarise our current assessment of the macroeconomic outlook, and explain our monetary policy decisions and operations. i will then briefly address fiscal policies and structural reforms. finally, i will focus on financial market conditions and prospects and will conclude by discussing envisaged policy measures aimed at restoring confidence and strengthening the resilience of the financial system. before doing so, i would like to highlight an important event : the third enlargement of the euro area with the adoption of the euro by cyprus and malta on 1 january 2008. thanks to the meticulous preparations of all parties concerned, the changeover to the euro was very smooth and efficient in both countries. the single currency was received with great enthusiasm by the cypriot and maltese people and we warmly welcome them to the euro area. economic and monetary developments 2007 was a very good year for the euro area in terms of economic activity. real gdp grew by 2. 7 %, mainly driven by domestic demand. euro area exports also benefited from strong, albeit moderating, global growth. however, in the second half of 2007, the outlook for economic activity was clouded by unusually high uncertainty, stemming from the difficulty of ascertaining the potential impact on the real economy of the financial turmoil that erupted in august 2007. the balance of risks to the growth outlook tilted to the downside. with regard to inflation, the year 2007 was characterised by a number of challenges. in the euro area, average annual hicp inflation last year was 2. 1 %, that is, slightly above the ecb ’ s definition of price stability. however, in the last quarter of the year, annual inflation rates rose sharply, reaching a peak of 3. 1 %, driven largely by substantial increases in oil and food prices. notwithstanding these price shocks, wage growth remained moderate and medium to longer - term inflation expectations firmly anchored at levels consistent with price stability