real gdp in the third quarter of 2010, recent statistical releases and survey - based evidence confirm that the positive underlying momentum of economic activity in the euro area remained in place towards the end of 2010. looking ahead at 2011, euro area exports should benefit from a continued recovery in the world economy. at the same time, and particularly taking into account the relatively high level of business confidence in the euro area, private sector domestic demand should increasingly contribute to growth, supported by the accommodative monetary policy stance and the measures adopted to restore the functioning of the financial system. however, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors. in the governing council ’ s assessment, the risks to this economic outlook are still slightly tilted to the downside, with uncertainty remaining elevated. on the one hand, global trade may continue to grow more rapidly than expected, thereby supporting euro area exports. moreover, strong business confidence could provide more support to domestic economic activity in the euro area than is currently expected. on the other hand, downside risks relate to the tensions in some segments of the financial markets and their potential spillover to the euro area real economy. further downside risks relate to renewed increases in oil and other bis central bankers ’ speeches commodity prices, protectionist pressures and the possibility of a disorderly correction of global imbalances. with regard to price developments, euro area annual hicp inflation was 2. 2 % in december, according to eurostat ’ s flash estimate, after 1. 9 % in november. this was somewhat higher than expected and largely reflects higher energy prices. looking ahead to the next few months, inflation rates could temporarily increase further. they are likely to stay slightly above 2 %, largely owing to commodity price developments, before moderating again towards the end of the year. overall, we see evidence of short - term upward pressure on overall inflation, stemming largely from global commodity prices. while this has not so far affected our assessment that price developments will remain in line with price stability over the policyrelevant horizon, very close monitoring of price developments is warranted. inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. risks to the medium - term outlook for price developments are still broadly balanced but could move to the upside. upside risks relate, in particular, to developments in energy

the cyclical upswing started to materialise, however, increases in consumer prices over recent months were relatively large and protracted. this reflected mainly the impact of increasing oil prices seen throughout 1999 as well as, following the continued depreciation of the effective exchange rate of the euro, increases in import prices. these increases in oil prices and in import prices led to a situation where there were increasing risks of second round effects on consumer prices. with respect to both the first pillar and the second pillar of the strategy, developments over the last few months led the governing council of the ecb to raise interest rates. the main refinancing rate was raised to 3 % on 4 november 1999 and then to 3. 25 % on 3 february 2000. by raising interest rates in view of the developments that i just described, it was aimed to contribute to ensuring that the cyclical upswing currently under way in the euro area will be both strong and sustainable, because it will occur in an environment of price stability over the medium term. over the next months it is particularly important that social partners keep wage increases in line with price stability as well as being supportive of further growth in employment. the rate of unemployment in the euro area has fallen throughout 1999 but still remains high. a lasting reduction in unemployment could be achieved only if further progress is made in structural reforms aimed at promoting flexibility on the labour market, providing jobs to low skilled workers and facilitating the return to the job market of the long - term unemployed. in addition, the growth prospects of the euro area over the medium term would clearly benefit from the completion and further deepening of structural reforms promoting competition on the markets for goods and services. 2. euro area financial markets also for the financial markets of the euro area, structural reforms aimed at promoting competition appear to be necessary. these reforms will over time contribute to improving the working of financial markets integrated at the area - wide level. furthermore, the eurosystem has an obvious interest in well functioning and efficient financial markets because financial markets are the conduit through which monetary policy decisions are channelled into the economy. let me consider first the money market. in 1999, within the euro area cross - border operations constituted a large share of all operations on the money market. the market has evidently benefited from the creation of a strong and secure backbone of payment systems, including the real - time gross - settlement system operated by the european system of central banks ( escb ). the money market of the euro has