##ilient. the downward trend in annual m3 growth from mid - 2003 appears to have halted over the summer months, and the shorter - term dynamics of m3 have strengthened. this reflects the fact that the historically low level of interest rates in the euro area continues to support monetary expansion, especially of the most liquid assets included in the narrow aggregate m1. the low level of interest rates also fuels the growth of mfi credit. the annual growth rate of loans to the private sector remains robust, largely driven by the dynamism of mortgage loans. these are also supported by strong house price increases in several euro area countries. there remains substantially more liquidity in the euro area than is needed to finance non - inflationary growth. at present, it is not clear how this excess liquidity, which is mainly the result of past portfolio shifts, will be used in the future. if significant parts of these liquid holdings were to be transformed into transaction balances, particularly at a time when confidence and economic activity were strengthening, inflationary risks would rise. in addition, high excess liquidity and strong credit growth could become a source of substantial asset price increases. to sum up, annual inflation rates should fall below 2 % in 2005, but a number of medium - term upside risks to price stability need to be carefully monitored. cross - checking with the monetary analysis also supports the case for strong vigilance with regard to the materialisation of risks to price stability. let me also address the current evidence on fiscal developments, where the latest budgetary notifications are a source of concern. while some countries will maintain a sound budgetary position, a significant number of euro area countries are expected to record deficits near to or above 3 %. the aggregate euro area fiscal deficit - to - gdp ratio is expected to increase somewhat, as is the debt - togdp ratio. in the coming years, important challenges for the consolidation of public finances will have to be faced. member states need to renew their consolidation efforts and should not rely on one - off measures, so as to comply with their commitments under the stability and growth pact and to foster confidence. they must also set the right priorities in public finances, towards structural reform, innovation and competitiveness. this would very much support the lisbon agenda and thereby promote economic growth, foster job creation and reduce unemployment. concerning the european fiscal framework, the governing council is convinced that substantial improvements in the implementation of the stability and growth pact are possible and would be beneficial, while we

savers, beginning with those who have been hit hardest by the crisis. it nevertheless implies changes at both national and european levels. at national level, we need to prioritise public spending towards productivity - enhancing investment, ensure that labour and goods market are flexible, cultivate a supportive regulatory, judicial and educational environment, and open our economies to spur competition and encourage the emergence of new actors. opaqueness and vested interests17 are not only defining features of developing economies. successful reform in european economies hinges on efforts to curb rent - seeking behaviours. for example, doesn ’ t the single supervisory mechanism have the objective of freeing bank supervision from national politics? see european commission ( 2013 ). long term financing of the european economy, green paper, march. i refer here to the concept of “ limited access social orders ”, see north, d., j. wallis and b. weingast ( 2009 ). violence and social orders : a conceptual framework for interpreting recorded human history, cambridge university press. bis central bankers ’ speeches at european level, we need to provide a framework that supports and incentivises the introduction of such national policies. this is the role of economic union in the euro area, the “ e ” of emu. i would stress, however, that economic union does not mean defining a single economic model across all countries. on the contrary, its purpose is to create the conditions for each country to identify and develop its comparative advantage. paradoxically, it is only by encouraging difference – comparative advantage – that the euro area can achieve convergence – that is, a more even distribution of economic outcomes. avoiding re - nationalisation and protectionism let me finally address the third lesson learnt from east asia. europe needs to avoid protectionist temptations and calls for re - nationalisation. protectionism and beggar - thyneighbour policies would lead to further losses of welfare at both european and global level. fortunately, there has been no significant surge in barriers to global trade in recent years – unlike during the great depression – thanks to global and regional policy coordination. these efforts remain important. barriers to trade in goods and services cannot be raised within europe thanks to our single market and competition rules which are enshrined in european laws, but the single market can be further enhanced. savings have been partly re - nationalised as a consequence of financial fragmentation. this is a trend that, if left unchecked, can be fatal to the single market. completing the banking