households have been trying to recuperate from the loss of housing and equity wealth. in china, substantial stimulus measures have boosted domestic demand – including consumer spending and infrastructure. and the sizable drop in commodity prices from their 2008 peak contributed importantly to the narrowing of global imbalances. what is worrying, however, is that global imbalances appear to be growing once again as the recovery advances, and their nature is changing. whereas before the crisis, these imbalances primarily corresponded to unsustainable household spending in the united states, they now increasingly reflect unsustainable government deficits in a number of countries. it is clear that what is needed is a “ rotation of demand ” : surplus countries need to increase their domestic spending, while deficit countries need to decrease theirs. together with those adjustments in spending, exchange rates need to adjust – with a depreciation of the u. s. dollar against asian currencies – to support the corresponding adjustment of external current accounts. in this regard, china ’ s recent decision to enhance the flexibility of its exchange rate is an important step forward ; its full implementation will contribute to strong, sustainable, and balanced global economic growth. in the absence of these necessary policy changes, there are three main risks to the global financial system and to the global economy. one is that the status quo becomes increasingly untenable. if the surplus countries do not increase their domestic demand, the united states and other deficit countries will have trouble weaning their economies off fiscal stimulus. the result could be a buildup of public debt relative to the size of these economies, which could not continue indefinitely. these higher debt levels would tend to drive up long - term interest rates, by both increasing demand for available funds and by feeding concerns about how the ever - increasing debt burden would be resolved. recently, the bank of canada looked at the implications of this status quo scenario for global economic growth. following a short - term boost, global economic growth would fall steadily from the 4 per cent average of 2002 – 07 to below 3 per cent by 2013. in addition, macroeconomic imbalances would continue to grow, possibly setting the stage for another crisis. a second risk is that adjustment may be lopsided. even if the surplus countries do not expand their demand, the deficit countries may be forced by markets to reduce their fiscal deficits. in that case, there would be a deficiency of demand worldwide. with monetary policy constrained by the zero lower bound, def

, the economic analysis suggests that some upward impact on hicp inflation will result from the indirect effects of recent oil price rises and already announced changes to administered prices and indirect taxes. it also indicates that risks to price stability over the medium term remain on the upside. this assessment is confirmed by cross - checking the economic analysis with the monetary analysis. it is essential that such risks do not affect medium - term inflation expectations, which need to remain firmly anchored at levels consistent with price stability. monetary policy can thereby effectively contribute to sustainable economic growth and job creation. accordingly, we will continue to monitor very closely all developments with respect to risks to price stability over the medium term. as regards fiscal policy, most euro area countries have submitted their updated stability programmes, which include their medium - term budget plans. the upcoming assessment of these programmes by the ecofin council and their subsequent implementation provide an opportunity to forcefully underpin the commitment to sound fiscal policies and the rigorous implementation of the stability and growth pact. this would have an important positive effect on confidence. this effect is likely to be considerable if emphasis is given to well - defined and credible consolidation measures, restraint in expenditure commitments, and the incorporation of fiscal measures into a comprehensive and growth - friendly reform agenda. with respect to structural reforms, the governing council welcomes the ecofin council ’ s conclusions of 6 december 2005 on the lisbon national reform programmes and the intended response to the challenges of globalisation. in fact, the process of international economic and financial integration, characterised by strong growth in trade and capital flows, has been one of the driving factors behind the rise in europe ’ s prosperity over the past decades. the ongoing transformation of the world economy, reflecting technological advances and the entrance of new economies into the world market, again offers great opportunities in terms of higher living standards. in order to translate these chances into achievements, europe would greatly benefit from more flexible labour and product markets so as to speed up the necessary changeover from contracting to expanding activities and to minimise adjustment costs. it would also profit considerably from a more stimulative business environment which fosters the ability to innovate, invest and create new firms. moreover, a fully operational eu internal market, including for services, offers great opportunities. the initiatives taken to relaunch the lisbon strategy are a welcome step in the right direction. we are now at your disposal for questions.