and rigidities in the labour and product markets that limit mobility and competition is essential for infusing new dynamism into the european economy. such dynamism should to help boost aggregate demand. there is not enough time for me to address the necessary structural reforms. i should say, however, that, by improving the functioning and expanding the productive capacity of the euro area economy, greater market flexibility and higher productivity growth would also enhance the scope for monetary policy ’ s scope for supporting stronger demand without jeopardising price stability. in the united states, our central bank colleagues have been able to strengthen economic activity while maintaining low inflation because of the american economy ’ s flexibility and high productivity growth. 1 overall, the medium - term outlook for price stability is favourable and the prospects for stronger and broad - based growth are encouraging. needless to say, we will continue to monitor carefully all developments that might affect our assessment of the risks to price stability. this leads me straight to my next point. 2. fiscal developments and the single monetary policy at present, fiscal developments in the euro area pose a very serious challenge to economic and monetary policy in europe. we - and i can speak for all my colleagues on the governing council view this matter with deep concern. observing the manner in which the debate has evolved, and the public discourse surrounding it in several member states, some of us have a sense of deja vu - a feeling that we have experienced it all before. the process of widening budget deficits and the transmission of their effects on long - term growth is usually gradual. the anticipated short - term positive effect of deficits on aggregate output is often supported by arguments focusing on their immediate direct impact while neglecting their indirect and long - term unfavourable consequences. since the process is gradual, there are often, depending on the prevailing economic situation and the initial fiscal position, no visible strong indications of the ultimate adverse effects of persistently high budget deficits. as paul volcker once said : “ things continue in government unless you feel a crisis. in fact, we didn ’ t have a crisis, so the deficit persisted. ” as we know from experience in many countries, the necessary adjustment for correcting growing and persistent fiscal imbalances can be painful. moreover, in situations when the initial fiscal position of a country is unsatisfactory, as reflected not only in the budget deficit but also in the public debt - to - gdp ratio and the size of the unfunded

. with a balance sheet like this, some may think that we can afford to lean back in contentment and settle, from now on, for “ business as usual ”. given the forward - looking nature of monetary policy, however, and the degree of uncertainty surrounding the functioning of the economy and our ability to forecast future developments, a central banker ’ s job can never be considered done and it will never become “ business as usual ”. moreover, the ecb has further objectives to attain and tasks to perform in a rapidly changing economic and financial environment, not least because of the forthcoming enlargement of the european union. last thursday, the governing council decided to leave the ecb ’ s key interest rates unchanged. our judgement on the appropriateness of the current monetary policy stance is based on, among other things, the expectation of a gradual economic recovery in the euro area during the second half of the year, in an environment of improving activity in the world economy as a whole. this expectation is supported by new data releases, several forward - looking indicators including confidence surveys, recently published forecasts from official and private sources, as well as developments in financial markets. even though inflation may not fall over the coming months as quickly and by as much as had been previously anticipated, the medium - term outlook for price stability remains favourable. the past appreciation of the euro should continue to dampen import prices and it is presumed that wage increases will be moderate. finally, the strong monetary expansion, which we have been observing for quite a while, is not considered a factor adversely affecting this outlook, for the time being. the mild recovery underway in the second half of 2003 is expected to gain momentum over the next two years. the pace of economic activity, however, is likely to increase only gradually. consequently, average annual real gdp growth is projected to approach its potential level in 2005, while unemployment is not expected to fall next year. in the short run, the risks to growth appear to be limited and balanced. in the longer run, the balance of risks is more difficult to assess : they depend, firstly, on the sustainability of global growth, which may be undermined by external and fiscal imbalances in some parts of the world and, secondly, on the ability of the euro area economy to generate faster growth internally. in my view, the main lever for achieving higher growth in europe over the medium and longer run should be reforms on the supply - side of the euro area economy. eliminating constraints