performance of consumer spending. there is no doubt that there has been much to hold consumption back. employment and wage growth have been modest. high and volatile oil prices have had a dampening influence. in addition, savings levels have remained high, reflecting concerns, not only in relation to labour markets, but also about longer - term prospects for health - care and pension systems. thirdly, until recently, the corporate sector in the euro area has been engaged in a period of balance sheet restructuring, in response to the sharp rise in corporate debt which occurred as part of the late 1990s dotcom boom. a further problem has been the existence of significant structural rigidities in euro area labour and product markets, which are seen by many as holding back growth in the euro area economy. not surprisingly, given this background, economic recovery in the euro area was slow to take off in recent years. the problem was that the normal sequence of recovery, which tends to run, first, from a pick up in export growth, then to a recovery in investment and, finally, on to a strengthening of consumer spending, was not operating. while the external engine was firing strongly, the domestic engine was not. more recently, however, developments have become more encouraging. following four quarters of moderate growth between mid - 2004 and mid - 2005, there are signs that euro area growth is gathering some momentum. while quarterly growth rates were somewhat volatile in the second - half of last year, looking through these short - term fluctuations, the evidence suggests that economic activity is improving. of course, external trade continues to provide significant impetus to growth in the euro area. however, there are now also some signs of an improvement in domestic demand. business confidence has strengthened significantly since last summer, contributing to a welcome recovery in investment. the improvement in investment reflects not only the favourable external stimulus, but also the impact of improved business balance sheets and efficiencies, as well as rising profitability. however, progress remains slow in relation to consumer spending – the main element of domestic demand. while consumer confidence has picked up in recent months, consumer spending growth remains subdued, though there are one or two signs of improvement. looking ahead, the view of the governing council is that the conditions remain in place for ongoing economic expansion in the euro area. a favourable external environment should continue to provide support for exports. investment should also benefit from what are still very favourable financing conditions, improved business balance sheets and gains in corporate earnings. on the consumer side,

, we have seen persistently strong growth in money and credit. this points to potential risks to price stability in the medium to long - term. we are mindful of these risks and we will continue to monitor these developments closely. another internal issue is fiscal policy. while we have gone through a difficult period, we now have a revised stability and growth pact with a better economic rationale, but with a degree of flexibility that could be misused. with economic growth and prospects improving, countries with excessive deficits need to use the “ good times ” to make progress towards sound public finances ( i. e. maintaining or attaining budgetary positions close to balance or in surplus ) by setting sound consolidation plans. these consolidation efforts will be more effective if they are part of a comprehensive reform programme, which includes setting out concrete measures needed to prepare for the long - term fiscal challenges. developments outside the euro area finally, i would like to say a few words about developments in non - euro area eu countries. enlargement of the european union was a truly historic event and all the more so having occurred so smoothly. the economies of the new member states have benefited greatly from accession and continue to converge towards the rest of the eu at an impressive pace. crucially, this is being driven by strong growth in productivity, a reflection of extensive structural reforms. this supports strong growth in exports, underpins capital inflows and allows wages to increase quite robustly without giving rise to inflationary pressures. as a result, inflation rates have generally declined or remained moderate, even after long periods of sustained economic growth and sharp increases in oil prices, though inflationary pressures have become evident in a couple of cases. central banks in the new member states deserve a good deal of credit for managing inflation expectations effectively but this should not disguise the difficulties that they face, as overheating is an ever - present threat. fiscal policies, on the other hand, could do more in some instances to stem domestic economic pressures, notwithstanding the need to modernise public infrastructure. current account deficits are generally high but i would see this largely as a reflection of the convergence process. in a few cases, however, some moderation in import demand would be welcome. the main exchange rate developments have been the entry of seven currencies into erm ii over the past two years. a high degree of exchange rate stability has been achieved, with all currencies trading either close to or at their central rates against the euro. this