sectors where the fundamentals are sound. iii. the outlook for the european economy against the background of this assessment of financial market developments, how do we see the outlook for the european economy? to what extent does the recent episode influence real economic activity in the euro area? the overall potential impact on the real economy of increased financial market volatility and the repricing of risk is difficult to gauge. so far, the effects of the market turbulence on the euro area economy have not been significant, despite some tightening of financing conditions. clearly, the potential effect will depend on future financial market developments. the longer credit market tensions persist, the greater will be their impact on the economy. the most likely scenario – that financial market conditions progressively normalise over a period of time – implies that the effects of the financial market turbulence on bank intermediation and the cost of capital are likely to be contained. therefore, even if lending standards are somewhat tighter than before and risk premia and the cost of capital increase by a modest amount, their impact on economic activity can be expected to be moderate. more generally, looking ahead over the policy - relevant medium - term horizon, we should assess the likely effects of all relevant factors – economic, financial and monetary – on the european economy ’ s prospects. the good news is that the fundamentals of the euro area economy remain strong and global economic activity is expected to remain robust. the expected slowdown of the us economy is likely to be largely offset by strong growth in emerging markets. in particular, the fast pace of expansion of economic activity in emerging asia is expected to contribute to more 50 % of the projected rate of growth of global aggregate demand outside the euro area. it will, therefore, continue to provide support to european exports and investment. moreover, domestic consumption growth should rise gradually over time, as employment conditions are expected to improve further and in line with real disposable income developments. all in all, the strong economic fundamentals, the expected global robust economic growth in the remaining part of this year and in 2008, and our current assessment of the likely future financial market developments imply that average euro area real gdp growth in 2007 and in 2008 will be negatively affected only slightly by the recent financial market turmoil and euro area economic activity will continue to expand at sustained rates, in line with potential growth. the eurosystem staff projections published earlier this month foresee average annual real gdp growth in a range between 2. 2 % and 2. 8 % in

will explain in today ’ s speech – the struggles of banks are not innocuous from a monetary policy perspective given their integral role for monetary policy transmission and macroeconomic performance more generally. and the newfound financial resilience of the euro area banking system can only be sustained if it is accompanied by improved financial performance in the future. so the situation needs close attention and the risks must be carefully monitored. but in my view, the path towards a more healthy and sustainable sector involves a clear division of responsibilities. monetary policy will continue its accommodative stance until inflation returns to our aim, which will remove some of the cyclical drivers of weak profitability linked to disappointing nominal growth. this will require interest rates to remain low for an extended period of time. as such, it is urgent that, in parallel, steps be taken to address the other challenges depressing profitability : tackling legacy npls, responding to structural change, providing regulatory clarity. such a comprehensive approach means both private actors and other policymakers must play their part. let me address these points in greater detail. monetary policy effectiveness and the state of the domestic banking system in a predominantly bank - intermediated financial system like the euro area ’ s, monetary policymakers have an inherent interest in the position and prospects of the domestic banking system. this interest has three dimensions : the efficiency of monetary policy transmission ; economic shock - absorption ; and longer - term macroeconomic performance. efficiency of transmission relates to the capacity of banks to pass on monetary impulses to the real economy, which is an essential pre - requisite for central banks to influence cyclical conditions and ensure price stability over a medium - term horizon. bank - enabled economic shock - absorption relates to the capacity of banks to accommodate temporary financing needs of firms, households, and the public sector, thereby helping them follow smoother spending and investment profiles and, in turn, mitigating the macroeconomic fluctuations that follow from a given shock. finally, the contribution of banks to longer - term macroeconomic performance stems from their capacity to allocate capital to the economic sectors deploying it most productively and to facilitate savings and investment decisions by bridging the gap between current and future spending decisions. in other words : a healthy banking system makes it easier for central banks to respond to a given shock ; it reduces the overall impact that this shock would exert on the economy, even absent a 2 / 8 bis central bankers'speeches monetary response ; and it improves the steady