and many eastern european, middle eastern and african countries. meanwhile, nearly one - third of all international debt securities are denominated in euro, and the euro accounts for about 25 % of global foreign exchange reserves. since its introduction, the euro has become the second most widely used currency in the world. moreover, with 646 billion banknotes and coins in circulation, the euro has already overtaken the us dollar. 1 in a global perspective the eu and the euro area are unique. no other model of supranational cooperation or agreement has achieved such a high level of integration. in the classification of the imf, the euro area is the 3rd largest economic area in the world in terms of real gdp ( 15 % ), after the us ( 20 % ) and developing asia ( 27 % ). moreover, following a few years of economic sluggishness, the euro area is now becoming an ever larger player in the global economy, thereby contributing to an urgently needed usd banknotes and coins : usd 810 bn = eur 615 bn ( all data and the exchange rate at end - 2006 ). rebalancing in global economic growth. economic activity, in fact, accelerated to 2. 7 % last year, and since the start of monetary union real gdp growth has averaged 2. 1 %. the ecb staff projections from march 2007 see growth ranging between 2. 1 % and 2. 9 % in 2007 and between 1. 9 % and 2. 9 % in 2008. unemployment has declined significantly, from 9 % in 1999 to 7. 2 % ( march 2007 ), a development which is particularly welcome. 12 million new jobs have been created since 1999. on average, inflation has stood at 2. 1 % since the start of emu, which shows that inflation expectations are firmly anchored. hence, price stability has created a favorable environment for investment and growth in the euro area. concerning the outlook for prices, the ecb staff projects annual inflation to average between 1. 5 % and 2. 1 % this year and between 1. 4 % and 2. 6 % in 2008. risks to the medium - term outlook for price stability remain on the upside, relating in particular to stronger than currently expected wage developments in a context of ongoing robust growth in employment and economic activity. given the vigorous monetary and credit growth in an environment of already ample liquidity, the governing council of the ecb will continue to be strongly vigilant in order to

the international financial system would be wasted if they cannot build on the preparedness of any country in the world to keep its own house in order. if this effort is pursued collectively, for example on a regional level, a higher leverage can be achieved. monetary and fiscal discipline in the euro area and structural reforms making the economy more flexible will both make the euro area less prone to originate shocks but also less vulnerable to outside shocks. the third avenue public policy should take is to give more attention to the legal infrastructure of financial markets, covering both bankruptcy procedures and effective corporate governance. this could also be a standard feature of international surveillance. “ ordnungspolitik ” thus has to get prominence in the design of worldwide integration and liberalization strategies. the liberalization of capital movements, as desirable as it is, must go hand in hand with the establishment of sound and efficiently supervised financial systems ; otherwise not only the countries which liberalize prematurely would suffer from a potential sudden reversal of capital flows and the ensuing exchange rate and economic crisis, but also the world economy as a whole would be hit. let me just mention that - due to the asian and russian crises - some regions of the euro area will experience substantially lower growth this year than last year, and for the same reasons real growth in the euro area as a whole dropped from around 3 % in 1998 to an estimated 2. 1 % this year. to sum up, public policy in general and financial supervision in particular thus have an important role to play. they have to keep the long - term stability and health of the financial system in mind, correcting for the - very often - rather short - term orientation of financial markets. public policies should be designed to avoid the headache after the party, by moderating exuberance and exaggeration. this is certainly more easily said than done and probably not always popular. but are watchdogs there to be popular? 5. let me now turn to the question of why financial stability issues are of concern to central banks. first, central banks must nowadays even more than in the past know what is going on in financial markets. they need to be in a position to assess how the transmission mechanism is influenced by changing financial market conditions. moreover, monetary policy must have an interest in the smooth functioning of the financial system. as the japanese example shows, monetary policy may become ineffective when there is a liquidity trap or when bank lending is restrained by the need to rebuild capital in the aftermath of