s monetary analysis. concerns relate to continued strong monetary and credit growth, which reflects the sustained stimulative effect of the historically very low level of interest rates in the euro area. since monetary dynamics are driven mainly by developments in the most liquid components of m3, the stock of excess liquidity which has built up over the past few years may increasingly entail upside risks to price stability in the medium to longer term as economic activity gains momentum. finally, the strong monetary and credit growth and, in particular, the marked growth in loans for house purchase require careful monitoring in view of the strength of house price dynamics in some regions of the euro area. the stability and growth pact i should like now to address a number of economic policy issues, starting with the eu fiscal framework. in 2004 the debate concerning a reform of the stability and growth pact intensified, subsequent to the judgement of the european court of justice annulling the conclusions of the ecofin council of november 2003 and following the commission ’ s proposals to strengthen economic governance and clarify the implementation of the excessive deficit procedure. throughout that debate, the ecb clearly and consistently stated its position, namely that improvements in the implementation of the pact, particularly the strengthening of its “ preventive arm ”, were possible and, indeed, welcome. at the same time, the ecb warned against any weakening of the pact ’ s “ corrective arm ” and of the provisions governing the excessive deficit procedure, as these could be detrimental to the credibility of the fiscal framework. in march 2005 the european council unanimously approved a number of changes to the pact. there are some aspects of the reform which can potentially help to strengthen the “ preventive arm ” of the pact, provided they are implemented effectively. the agreed amendments, however, also allow – against the advice of the ecb – for greater flexibility as regards the “ corrective arm ” of the pact. specifically, the reform of the excessive deficit procedure implies a shift towards a more judgemental approach to the enforcement of fiscal discipline, for example by allowing the commission and the council to take into account “ other relevant factors ” or by making the time frame for correcting excessive deficits more conditional. i should recall that the ecb has stressed the vital importance of implementing the new framework in a manner conducive to prudent fiscal policies. it is essential that decisions and actions to be taken in the context of the reformed pact do not undermine confidence in the european fiscal framework and in the sustainability of public

our ability in the efforts to the green the financial sector. 2 / 3 bis - central bankers'speeches of course, the new risks we are facing do not mean that the classic ones have just disappeared. the uncertain macro - financial environment, coupled with persistent geopolitical tensions continues to shape the outlook for the european banking sector. hopefully, the relaxed atmosphere we have created will contribute to open discussions. but before getting back to meetings tomorrow, please enjoy the evening and dinner in ljubljana together. thank you. 3 / 3 bis - central bankers'speeches