policy having the broad support of the general public, and to defend its independence against any political pressure. that has become apparent again during the past few weeks. and the confidence which the markets have always shown in the bundesbank is based on such experience. the european central bank still has to earn that confidence, however. as i understand things, this will be all the easier, the greater is the stock of confidence introduced by the national central banks from their own countries. in other words : the more persistently policy makers in all the participating countries champion the independence of the european central bank and then also respect its monetary policy decisions. for the euro to be successful, however, it is also important for 3. the european countries to solve their structural problems and to face up to the new challenges. the resolution of the european council on growth and employment states that “... it should be a priority aim to develop a skilled, trained and adaptable workforce and to make labour markets responsive to economic change. structural reforms need to be comprehensive in scope... ” that statement is actually true. apart from that, it has little to do with monetary union per se. those problems and challenges exist anyway : - - persistently high unemployment, for example, which - even with a cyclical upturn - is unlikely to fall significantly without structural changes ; in a large number of countries, the welfare state is increasingly reaching - or has already reached - the point where it cannot go any further in terms of funding ; demographic trends call for timely adjustments in health care and retirement provision ; advancing economic globalisation is intensifying competition and calls for new thinking and action. those are undoubtedly only some of the tasks. we are all aware of the pressing problems in our own countries. each country must find its own, nationally appropriate solution. for it is certain that the euro will, if anything, further intensify competition to win inward investment within europe. at the same time, europe ’ s structural weaknesses will be revealed more starkly in an international comparison. no one should indulge in any illusions. the euro cannot pay off past debts nor can it eliminate unemployment that has already been created. on the contrary, increasing demands will be placed on the participating countries as a result of them dispensing with their own exchange rate and interest rate policies. the problems that exist must therefore be solved, if possible, before entry into monetary union. it is precisely in the case of economic divergence in the

various issuers as well as differences in liquidity between securities. furthermore, divergences purely related to the location of market participants within the euro area will have to become less and less relevant over time. it is important to remember that the capital markets of the euro area began the process of integration well before the start of stage three of economic and monetary union. an indication of the pace of integration before january 1999 is provided in particular by the evolution of spreads between yields on bonds issued by the various central governments of the euro area, which narrowed continuously from mid - 1995 onwards. the factors that contributed to this favourable pattern included increased convergence towards low rates of inflation across the euro area during stage two, the gradual reduction and finally the elimination of exchange rate risks, the commitment of governments towards improving the sustainability of public finances. a further factor was the improvement of the depth and liquidity of government bond markets themselves. the integration of the euro area central government bond market is therefore well under way. differences in bond yields should be reflective of differences in creditworthiness of debtors, and even more so of the liquidity of a given bond. this liquidity effect is visible in the term structure of yields across the euro area, as the lowest yields at different points on the maturity spectrum have been seen on bonds that have been issued by different countries in the euro area that have had different credit ratings. turning to equity markets, a similar process of integration is apparent. with regard to the behaviour of investors, an increasing number of equity market participants already appear to be taking investment positions on the equity market of the euro area from a sectoral rather than a national perspective. reflecting this development, various market participants have made both area - wide and sectoral equity indices available, thus providing investors with opportunities to monitor area - wide equity investment positions. furthermore the institutional set - up of stock exchanges is showing signs of an evolution towards more integration and greater market efficiency. as consolidation within the financial services sector has increased the size and geographical reach of intermediaries and fund management institutions, they and also some listed companies seem to be pressing for marketplaces to become more concentrated in order both to reduce costs and to enhance liquidity. financing in the euro area capital markets the euro area bond market is the second largest market in the world after the us market. however, the euro area market is not yet as integrated as the us market, implying that some of the benefits of a large market have yet to be realised. looking at financing