if and when it is necessary to redress the situation, it is pure arithmetic that you have first to reduce spending and, if a gap remains, increase tax receipts. we would certainly recommend cutting the level of public spending in economies that have a high level of public spending in proportion to gdp. but we can not rule out the possibility of increasing taxes. 9 ) even if it happens at the expense of growth? answer : in the opinion of the governing council, which includes also mario draghi ( banca d ’ italia ), nout wellink ( de nederlandsche bank ), vitor constancio ( banco de portugal ) and erkki liikanen ( suomen pankki ), sound fiscal policies are not hampering growth but fostering growth. we believe that, if the stability and growth pact is not respected, what we would lose in terms of the confidence of households, entrepreneurs and the economy in general would decrease growth more than the illusory expansive impact of a fiscal deficit. 10 ) and would you agree with a country, for instance italy, raising taxes but putting off cutting labour costs? answer : we have two different questions there. one is if an economy has lost a certain degree of cost competitiveness and has to regain it. and to regain it at the level of enterprises and of the productive sector, it is decisive to rely upon unit labour costs that would augment less than the average of the euro area in order to regain cost competitiveness. that is the first remark, which is always true in any circumstances. regardless of whether you have budget problems or not, you have to be sure that you are progressively regaining an appropriate level of cost competitiveness. 11 ) what about the second question? answer : then you have the second question associated with the budget situation : the goal is very clearly the rigorous implementation of the stability and growth pact. and the way you do it logically is by reducing public spending as a priority and then by increasing taxes if and when needed. 12 ) are you concerned that italy and other countries with difficult deficit and debt positions may put the euro at risk? answer : no. the euro is a very solid currency of which we are ourselves the guardians. but good policies at national levels would augment growth, prosperity and job creation. 13 ) are you concerned that, now that growth is picking up, some countries have budget deficits exceeding the 3 % limit? answer : we should not repeat the mistakes of the

outside of motor vehicles, which had benefited from the earlier decline in the dollar and strong foreign growth ; it fell for a third consecutive month in august, and indications for september suggest a further decline last month, even after excluding the effects of the recent hurricanes and the strike at boeing. meanwhile, inflation remained uncomfortably high through much of the summer. the sharp increases in the prices of oil and many agricultural commodities showed through to consumer food and energy prices, and producers passed through some of their higher input costs into retail prices for " core " goods and services. more recently, however, the prices of oil and other commodities have posted substantial declines, non - oil import prices have edged down, and the prospect of greater slack in resource markets and weak demand seems likely to restrain labor cost pressures and pricing power. reflecting these developments, inflation expectations appear to have eased a bit. the weakening u. s. economy and ongoing declines in house prices, with their implications for credit performance, put further pressure on exposed financial institutions over the summer. investors lost confidence in some of these institutions, which then saw their access to liquidity dry up, causing some to fail and others to require government assistance or to consolidate via their acquisition by healthier institutions. the speed with which these developments occurred, along with worries about losses throughout the financial system, led banks and other lenders to pull back from extending credit except at the very shortest maturities. as a result, conditions in funding markets deteriorated substantially further in september and early october, with interbank lending rates moving up sharply from already - high levels and spreads over comparable - maturity overnight index swaps widening to unprecedented levels. in addition, the commercial paper market became severely disrupted as money market mutual funds, the largest investors in that market, substantially reduced their demand in response to outflows and the difficulty of liquidating commercial paper in secondary markets. as a result, yields on commercial paper skyrocketed for most issuers, and funding became increasingly concentrated in paper with overnight maturities. similarly, interest rates on longer - term corporate bonds rose sharply even for investment - grade firms, and bond markets were closed off to many issuers. these developments quickly led to sharp declines in equity prices more generally, as well as to widespread disruptions in other markets, including the markets for municipal bonds. market distress fed on itself, as efforts by lenders to protect themselves triggered calls for increased margins, sales of assets that accentuated price declines, large increases in volatility in an