- and hence the riskiness of financial investment may change quickly and in an unpredictable way. again, it is important to recognise that such change is not limited to the tech sector. the general merchandise store chain that fails to adopt new it - based methods of inventory management will likely lose out to those firms which master the use of it. the other aspect is that risks become more firm - specific as the success of a company is becoming increasingly dependent on “ soft ” factors such as information on customers ’ preferences. for the financial system, these changes create the need for adjustment in three areas : the design of financial contracts, the valuation of firms and assessment of business risk, and the risk management of financial institutions. let me first look at the design of financial contracts. it increases the need for capital that bears business risk, and for corporate governance structures that create incentives to adapt to new ways of production. this points to a greater role of equity and of financial contracts incorporating equity characteristics, something that has been observed over the past couple of years. venture capital has offered a way to combine funding of high - risk projects, and managerial support, in a flexible way for new and innovative firms. established firms in the it sector, but also in other industries, have increasingly relied on public equity and on debt instruments incorporating equity characteristics. examples are convertible bonds, issuance in the high yield segment of the bond market, coupon step - up clauses, or bank loans which link the credit spreads charged to a borrower ’ s actual performance. one observation relevant for public policy is the importance of venture capital for the development of new industries. clearly, the venture capital market warrants the attention of public policy, including issues such as investment opportunities for institutional investors and the existence of market segments complementary to a functioning venture capital market. for example, a developed equity market is required as an exit route for venture capital investments, and for the provision of sufficient risk capital in the later stages of the corporate life cycle. the second set of issues relates to the valuation of firms in the equity markets. overshooting expectations, and swings in sentiment, are to some extent an unavoidable by - product of innovation. but in order to minimise such overshooting, looking ahead, one important issue is to identify mechanisms that support efficient equity valuation. consistent and open reporting of corporate accounts is one central issue in this respect. on the positive side, the huge loss in equity wealth has not triggered any major default among financial inter

still very much in place even though downside risks persist. we still expect the german economy to grow roughly in line with potential in 2008 and see no need to substantially change our december 2007 projection. there are three main factors that support this favourable outlook. 1 ) the remarkable efforts made by german companies, wage bargainers and politicians over the past few years, namely restructuring measures, wage moderation and labour market reforms, have strengthened corporate balance sheets and boosted the price competitiveness of german firms. it is worth recalling that these efforts were the outcome of a painful learning process resulting from years of stubbornly high unemployment and competitiveness problems for major german industrial sectors. now that these efforts are starting to bear fruit, it is essential that all parties concerned do not abandon them for short - time vested interests and thereby jeopardise the sustainability of economic growth. 2 ) the second reason for german firms ’ relatively good position is external demand. in this context, fears are frequently voiced that the strong euro and the slowdown of the global economy could prove a drag on german export performance. to date, these fears have not been realised. first, the major share ( that is more than 40 % ) of german exports goes to the euro area and is therefore not affected by exchange rate movements – at least not directly. in addition, total german exports include an increasing percentage of capital goods ( such as machines and technical equipment ), for which global demand is less price - responsive. second, a considerable portion of germany ’ s exports goes to new and faster - growing markets, such as asia and the new eu member states, which have so far proved fairly resilient to the slowdown in the us economy. third, the euro ’ s appreciation should not only be viewed from the perspective of external demand. a strong euro simultaneously dampens the prices of import goods. this helps to curb the inflationary pressures resulting from strong rises in energy and food prices and thus has a stabilising effect. 3 ) the third factor in favour of a fairly optimistic economic outlook for germany is that the ongoing financial market turmoil has so far had no discernible impact on the german economy. in particular, credit growth is still robust, the german housing market is not overstretched, corporate balance sheets remain strong and consumers are not excessively leveraged. so far, the german banking system has proven sound. admittedly, the ongoing adjustments in the global financial markets will be associated with a number of further challenges for banks both