a global impact and react very amply to small changes in supply and demand equilibrium. they act as amplifiers and transmitters of disinflationary pressures. powerful headwinds – and disinflationary forces - are coming from the deleveraging process especially in the euro area, due to the importance of the banking sector and the amplitude of its balance sheet adjustment. we are working very hard to repair the bank - lending channel in the euro area. we have achieved a lot by creating the banking union and the ssm in less than two years – which is unprecedented in european history. also, the process of balance sheet repair for banks is well underway in the euro area and we will make sure that the forthcoming asset quality review removes any doubt as to the sustainability of the euro banking sector. furthermore, for the euro area, there is the exchange rate question. as you all know, from a monetary policy perspective, the exchange rate is not a policy variable, let alone a target. but bis central bankers ’ speeches it is obviously a very important input when considering overall monetary and financial conditions. the recent appreciation of the euro has had a strong disinflationary impact. we could discuss further the different causes of low inflation in the debate, but let me make some remarks on this crucial matter for us central bankers. first, low inflation is not deflation. as many analysts and observers are today alarmed about deflation in the euro area, it is useful to understand the difference. deflation is a permanent and cumulative process of decrease in the overall price index, fuelled by negative expectations. deflation is a pernicious spiral. because consumers expect prices to decrease continuously, they tend to defer purchases, thereby further fuelling the deflation process. deflation increases the real burden of debt and creates an incentive to defer investment. deflation is especially dangerous because, as the experience of japan has shown, once it becomes entrenched, it is very difficult to stop. from this perspective, there is no deflation today in the euro area. prices are still increasing and, most important, so are nominal wages. and, as i said, inflation expectations remain firmly anchored in positive territory, even in the short run. second, low inflation provides economic stimulus by boosting real income. in most parts of the euro area, nominal wages are downward rigid. every time inflation “ surprises ” on the downside, it creates an unexpected increase in real wages and purchasing power.

bank of france reports industrial output continued to grow in most sectors in france in january 1997 bank of france, monthly business survey, 17 / 2 / 97. in january, according to the business leaders surveyed by the banque de france, industrial output continued to grow in most sectors. activity was especially buoyant in the intermediate goods and consumer goods sectors. the food processing sector was alone in recording a contraction in activity. the capacity utilization rate improved. overall demand strengthened further. french products were very competitive on foreign markets and this led to an increase in export orders. export sales increased in the united kingdom, italy and germany, while demand remained firm in the united states and asia. on the domestic market, inter - industry demand was strong, even though the orders received came with very short delivery times in most cases. order books are now near to normal levels. they are still considered to be low in the food - processing and automobile industries, but are deemed to be satisfactory in the capital goods and consumer goods sectors. inventories of finished products are gradually returning to normal overall, but they still exceed the desired levels in the consumer goods, food - processing and intermediate goods sectors. the outlook for the coming months is distinctly brighter. activity should increase in all sectors, with marked improvements in the intermediate goods and food - processing sectors. commodity prices were stable overall, while finished product prices declined slightly. this fall stemmed mainly from substantial price cuts in the automobile industry, while prices generally held up in the other sectors. investment plans for 1997 appear to be less ambitious on the whole compared with capital spending plans at the same period in 1996. nevertheless, the business leaders polled in january were more confident about future activity than they were a few months earlier. this could mean that previously postponed investment plans may be implemented in the coming months. however, plans for increasing output capacity remained few and far between, owing to the spare capacity currently available, and depend on stronger growth in demand. retail sales in january were up markedly over december 1996, and only slightly down on the exceptionally high level recorded a year earlier. employment levels remained stable in nearly all industrial sectors. they showed only a slight change in the services and retail sectors, but there were further falls in the building industry.