public deficits seems to be coming to an end, important challenges for the consolidation of public finances are to be faced. member states should use the improvement in the macroeconomic environment for renewed consolidation so as to comply with their commitments under the stability and growth pact. clearly, this would add credibility to the european fiscal framework and create confidence in the sustainability of public finances, thereby reinforcing confidence in the overall economic outlook. as recently stated by the ecofin council, budgetary policies need to set the right priorities towards structural reform, innovation and competitiveness in support of the lisbon agenda to promote economic growth and employment creation. fiscal consolidations should be designed to form an integral part of such a comprehensive reform strategy. as regards the european fiscal framework, the governing council is convinced that, whilst substantial improvements in the implementation of the stability and growth pact are welcome, there is no need for changes to the text of the treaty and of the pact itself, namely the regulations concerned. the pact is a very important and pertinent framework for dealing with countries ’ fiscal developments on a level playing - field, particularly within the single currency area. at the same time, we consider that improvements could be introduced in its implementation. there seems to be some common ground on elements to improve the implementation of the preventive arm, and the need for a stronger focus on public debt and sustainability. as regards the corrective arm of the pact, the ecb ’ s main message is that the nominal anchor of the framework, namely the 3 % deficit - to - gdp reference value should not be undermined. therefore, proposals that would allow for a loosening of the excessive deficit procedure, such as suggestions put forward with regard to the definition of exceptional circumstances and the time frame for the correction of excessive deficits, and proposals to introduce country - specific elements are not contributing to the solidity and soundness of emu in our view. a sound monetary policy and a stable macroeconomic framework are necessary for sustainable economic growth in the euro area. but this alone is not sufficient. the implementation of well - designed structural reforms in labour, product and capital markets is of the utmost importance for the euro area at the current juncture. the economic recovery would be stronger and more sustained if ambitious, well - designed structural reforms were to be implemented that improve the microeconomic fundamentals of the euro area and its resilience to adverse domestic and global economic developments. in this respect, a convincing commitment to the implementation of structural reforms and

i gave in april. they indicate that the economic recovery in the euro area has maintained its momentum. in the second quarter of 2004, real gdp grew at a rate of 0. 5 % relative to the previous quarter, after 0. 6 % in the first quarter. the conditions for a continuation of the economic recovery remain in place. on the external side, global demand remains robust, notwithstanding temporary fluctuations, contributing to euro area export growth. on the domestic side, higher corporate profitability and favourable financing conditions should support business investment. in particular, the level of interest rates is very low by historical standards, in both nominal and real terms. private consumption should also be sustained by growth in real disposable income and, with some time lag, by an improvement in the labour market. against this background, we expect the present gradual recovery to continue in the coming quarters and to become more broadly based, leading to a somewhat stronger upswing in the course of 2005. this picture is consistent with the most recent ecb / eurosystem staff economic projections which, as you may be aware, are now published on a quarterly basis. the last projections, published on 2 september, envisage that euro area real gdp growth will recover from 0. 5 % in 2003 to between 1. 6 % and 2. 2 % on average in 2004, and will be slightly higher, between 1. 8 % and 2. 8 %, in 2005. i should add that forecasts from international organisations and other sources convey a broadly similar picture. while this outlook for economic activity is surrounded by some uncertainty, overall the risks appear to be broadly balanced. on the upside, the momentum of the recovery, which was stronger in the first half of 2004 than was anticipated earlier in the year, may imply a positive stimulus in the coming quarters. on the downside, there are still concerns about continuing economic imbalances in other parts of the world which could affect the sustainability of the economic recovery, at both the global and euro area levels. in addition, if oil prices were to reach higher levels than currently expected by markets, this could dampen somewhat both foreign and domestic demand, even if the recent rise in oil prices cannot, by any mean, be compared with the historical first and second oil shocks of the 70s and the beginning of the 80s. regarding the outlook for inflation, recent oil price developments, together with increases in indirect taxes, have pushed inflation rates in the euro area to levels somewhat higher than