those seen in the pre - crisis period, which were – in hindsight – not sustainable. it will also increase banks ’ loss absorption capabilities by increasing the level and the quality of their capital buffers. the four points i have just mentioned relate to policy action to be taken in “ deficit ” countries in the euro area. a natural question to ask at this point is what policy action could be taken to help eliminate imbalances in “ surplus ” countries. there is a debate underway on this issue. some commentators argue that surplus countries should pursue policies that are symmetric to those of the deficit countries. if deficit countries have to restrict their domestic demand through fiscal contraction or wage containment, then surplus countries should increase their domestic expenditure by engaging in fiscal expansion or wage increases. this type of arguments can go too far. in some cases, there may be some room for manoeuvre, but even if it is ignored that the euro area is not a closed economy, so that all members have other markets to support their growth, it would not be right to ask countries to compromise unreasonably on their international competitiveness or to put the sustainability of their public finances at significant risk. still, it is true that a reduction of the current account deficits of some countries may, through the mechanics of the operation of a monetary union, imply a reduction of surpluses in other countries. from a euro area - wide point of view, wage moderation in the deficit countries is a negative inflationary shock to the area as whole. the ecb ’ s monetary policy, which focuses on price stability in the euro area as a whole, would take that development into account. the resulting stance of monetary policy will affect wage and price developments in the surplus countries, aiding the adjustment in competitiveness. similarly, the stance will affect demand in the surplus countries, again fostering adjustment. that said, there is scope for some supply side policy measures in surplus countries to facilitate adjustment. in cases where the current account surpluses reflect structurally low consumption or limited domestic investment opportunities, structural reforms should be implemented. the range of possibilities includes structural measures in the non - traded sectors, such as the deregulation of the services sector, for instance, thereby increasing productivity and growth, as well as changes in taxation to change incentives to spend. 4. avoiding imbalances in the future the experience of imbalances in the euro area in recent years is a convincing reminder that “ prevention is better than cure ”. looking

guy quaden : price and wage rigidities in an open economy opening address by mr guy quaden, governor of the national bank of belgium, at the fourth biennial colloquium of the national bank of belgium, brussels, 12 october 2006. * * * it is a great pleasure for me to open the fourth biennial colloquium of the national bank of belgium and to welcome you all at this conference. the topic of this year's conference is " price and wage rigidities in an open economy ". understanding how prices and wages are determined and how they fluctuate over the business cycle is of course a crucial issue for central banks. nominal and real rigidities in price and wage setting have a strong impact on how the economy, and inflation in particular, reacts to all kinds of shocks. as far as these rigidities result in deviations of prices from their efficient levels, they will lead to an inefficient allocation of resources and unnecessary volatility in output and employment. especially in a global context, with a rapidly changing external environment, flexible prices and wages can protect the economy against costly real adjustments and improve its resilience. that is the very reason why we are interested in measuring these rigidities, in understanding their nature and in assessing their welfare implications. this knowledge may eventually result in formulating deliberate policy recommendations for structural reforms in view of reducing rigidities in price and wage setting, to the extent that this is desirable from a welfare perspective. however, as far as these rigidities are deeply rooted, monetary policymakers are faced with them as part of the environment in which they operate. price and wage rigidities have indeed a strong impact on the monetary transmission mechanism. they also affect the way central banks will combine their pursuit of price stability with a more general concern about real economic developments and the policy trade - offs involved. the importance of these issues induced the national bank of belgium to devote its 4th biennial colloquium to " price and wage rigidities in an open economy ". the aim of this conference is to promote theoretical and empirical research, both at the micro and the macro level, on the measurement, the rationale and the consequences of price and wage rigidities in an open economy. by way of an introduction to the conference, i would like to underline the policy relevance of many of the topics that will be discussed in the presentations today and tomorrow. in order to evaluate the relevance of the different types of rigidities, it