and comparing the euro area with its major global partners, the fiscal problem appear relatively modest. next year, the average euro area budget deficit will be in the order of 4. 6 %. by 2012 it is expected to decline further to 3. 9 % ( source ec autumn 2010 economic forecast ). these expected numbers are about half the corresponding expected figures for the us and japan. the problem, the source of the current tensions clearly reside with national fiscal developments, notably localised in those countries that have not done enough to correct imbalances or to prepare for difficult times, when times were still good. we know that for several years, fiscal policies in some european countries have breached both the letter and the spirit of the stability and growth pact. the pact calls for budgets that are close to balance or in surplus over the cycle, deficits always below 3 % of gdp and a public debt level of below 60 % of gdp. when a few years ago it became clear that in some important countries fiscal policies would not be able to meet the rules of the stability and growth pact, it was not the policies that were changed but the pact. this was clearly a dark moment in the history of european policy decision making. in 2004 and 2005, the governments of the three largest member economies coalesced to try and dismantle the stability and growth pact. it was a very fierce battle at the time, and the ecb publicly voiced its grave concerns. the recent crisis has demonstrated that growing underlying macroeconomic imbalances can also destabilise fiscal policies and place a country on an unsustainable trajectory. a boombust cycle can mask a fiscal problem for a long time and suddenly expose the problem when it turns. high fiscal elasticities tend to curb budget deficits – and even produce overall surpluses – when asset price run - ups boost revenues from financial and housing transactions. the same elasticities, however, will send the budget into distress when the boom reverses. the second area of policy slippage concerns macroeconomic policies. here what stands clearly in front of the policymakers is the sustained increase in unit labour costs whose growth in some member countries has consistently outpaced both domestic inflation and euro - area average union labour costs. such competitiveness losses cannot be sustained forever, and catching - up phenomena can only explain a limited part of the process. sooner or later adjustments in unsustainable economic policies have to be made. fiscal and structural policies need to keep domestic demand

take this occasion to share with you the following observations : 1. appropriate laws and regulations are needed to foster a regulatory environment that is conducive to financial innovation. it is worthwhile to attempt new ideas as long as they would not contravene the requirements of existing laws and regulations. however, we must have a full understanding of the related risks. and, we must have an appropriate risk control system or measures to mitigate or eliminate the risks. apart from complying with necessary regulatory procedure, the new ideas must facilitate market development without impairing the rights of consumers. to this end, the qdii scheme for stock investment can serve as a classic example. the introduction and moderation of the qdii scheme as well as the gradual opening of the mainland capital market represent an important step towards financial system reformation. these measures are also financial innovation conducive to financial market development. based on this situation, we can expect more innovation in financial policies. in the near future, a wave of keenly anticipated innovations in financial institutions, products, service and cooperation will arise from innovated financial policies. 2. there should be ongoing observation of changes in market development, analysis of special needs of customers, segmentation of customers and markets, as well as the establishment of a system to trace the demand of market and customers. the regulators should proceed in tandem with the pace of market development and monitor changes and characteristics of consumer demands. as far as financial products are concerned, asset management and structural financing that are selling like hot cakes are good examples. 3. financial innovation should be adapted to time, place and people. this issue has been explored before with macao as an example. 4. maintain good communication between regulators and market participants. it is normal for regulators to receive tons of complaints and enquiries from consumers. as these letters are mostly pinpointing financial products and services, regulators would gain a better understanding or come up with a general idea on the types of services demanded by consumers during the course of handling these complaints and enquiries. 5. investors and consumers need education. it is desirable to initiate a two - pronged measure. based on the objectives of protecting the rights of the consumers and investors as well as facilitating the penetration of the financial market, the regulator can actively embark on financial consumption related education through various channels such as the media and topical exhibitions etc. on the other hand, the market participants are encouraged to launch more promotions that are infused with educational