- term approach to efforts to save, as shown a contrario by the developments in long - term investments following the shift of monetary policies in europe towards price stability in the last few years. the substantial share of life insurance investments of non - financial agents in the euro area serves to illustrate the point. this has risen from 18 % of investment flows of non - financial agents in the euro area at the beginning of the last decade to 26 % on average in 1997 and 1998. in the same way, bond issuance in europe intensified notably in 1999, although this is also explained by the disappearance of exchange risk within the euro area and the greater depth of the market. another indication of this trend towards the consolidation of savings is that the long - term financial liabilities of monetary financial institutions in the euro area increased notably in 1999 ( by 7. 2 % in the year to the end of november 1999 ). furthermore, the primacy of price stability contributes to improving macroeconomic stability, thus encouraging long - term investment. the reduction in real interest rates following the reduction in the inflation premium works in the same way. i should like to note here that investment and saving are two sides of the same coin ( as shown in the national accounts, which include investment within gross savings ), i. e. the accumulation of physical or financial capital with a view to a future return. third, price stability has major implications for the social distribution of efforts to save. price stability is especially beneficial for the less well - off sections of society, which often lack sufficient information to protect their savings in a period of inflation. at a time when we are very preoccupied by adjusting working hours and the retirement age, it is essential that everyone should have the opportunity to save, i. e. to set aside part of their future income, relatively safely. however, the principle of monetary stability very clearly highlights the issue of the distribution of income between generations. in a situation where the proportion of public spending has reached a very high level ( in 1999 it accounted for 49 % of gdp in the euro area, compared with only 39 % in japan and 34 % in the united states ) and where government deficits are limited by the treaty and can no longer be covered by inflation, the role of private savings in the future financing of retirement attains a crucial dimension. i should like to end this first part by saying that the positive effect of price stability on domestic savings naturally contributes, in the world capital market we live in, to guarantee

##ciary money or sight deposits which are remunerated only a little or not at all ( which accounted for 39 % of the monetary aggregate m3 in 1999 ). however, fixed - term deposits are not totally safeguarded from inflation where their remuneration is fixed over a specified period or where they only adjust to market rates after a time lag. in the same way, the remuneration of fixed rate debt securities such as bonds only includes expected inflation and is thus vulnerable to any unexpected change in inflation. it has been empirically established that, as intuition suggests, the volatility of inflation increases as it rises, which implies that risk premia are generally not in line with the real level of inflation. i should add that inflation creates a well known fiscal bias when flows of interest to creditors include an inflation premium to cover the depreciation in the value of financial capital during a period of inflation, and this premium, which is not real income, is charged. in fact, in a situation where inflation rises unexpectedly a transfer of wealth occurs from the creditors to the debtors. this interferes with the optimal allocation of savings ( i shall return to this issue ) when the transfers of wealth do not correspond to the provision of a service or a real economic cost, but have all the characteristics of a “ windfall profit ” or an exceptional loss. it can also result in a reduction in the amount of savings in two ways : by discouraging agents ’ propensity to save amounts subject to the monetary hazard ; and ( because of the bias resulting from the depreciation in the nominal value of debt and the fiscal distortion to which i referred ) by transferring inflationary income from the private to the public sector, which has a lower saving ratio. second, inflation not only affects the system of measurement of prices for goods and services, it also affects the quality of indicators of profitability and of interest rates. by way of an example, the profits of a firm can be artificially affected by differences between the posting dates of payments and receipts or by the incorporation of inflation premia into flows of interest. of course, these profits could possibly include a real gain linked to the reduction in real interest charges, but this does not correspond to the intrinsic profitability of the firm. in the same way, the comparability and thus the best selection of different investments is affected by the inclusion of higher inflation premia in reported rates of return. in addition, inflation discourages a long