is low and expected to remain low and subject to limited variations over the medium term, the prices of financial assets incorporate lower inflation risk premia, by contrast with a situation of high or uncertain inflation. as the inflation risk premium becomes relatively less important as a determinant of financial prices, other factors such as credit risk can take on a larger role in the price formation mechanism. ultimately, this results in a more efficient allocation of financial resources. in the run - up to stage three of emu, the governments of the european union also, where necessary, made efforts to reduce their deficits and their debt so as to bring them into line with the requirements specified by the maastricht treaty. as was intended by the drafters of the treaty, this development contributed to achieving sounder fiscal policies, which would be more conducive to economic growth over the medium term and which would make it possible for automatic fiscal stabilisers to work more effectively when needed. a further effect of the reduction in public deficits and debt, all other things being equal, is the freeing of financial resources for use by the private sector. this reduces hindrances to the development of financial markets for private borrowers such as the corporate bond market. a final item in this short list of the broad economic trends shaping the future of financial markets in the euro area is the phenomenon of population ageing. taken together with the liberalisation of financial markets, over the coming years population ageing will lead to further demand for long - term investment instruments on the part of rapidly developing pension funds, along the lines, for instance, of what we are already beginning to see in the united kingdom. as borrowers strive to meet the increased demand for investment instruments, this is likely to provide a further impetus to the development of a wide range of suited financial instruments available to pension funds, and more generally to savers at the end of the intermediation chain. having identified broad economic trends, which all seem to point in the direction of a wider role for financial markets in the euro area over the coming years, i should like today to discuss what has actually happened so far and consider what challenges lie ahead. i shall first consider the degree of development of the various segments of financial markets in the euro area, so as to assess whether and, if so, why some segments are less developed than others, at area - wide level. i will then move on to consider, more generally, the progress made in the

the level of the euro area as a whole. this mainly includes german government bonds and, at the shorter end of the maturity spectrum, french government bonds. furthermore, total turnover on government bond futures and options has become very concentrated on the contracts indexed on german government bonds, although there has been renewed competition from other contracts over recent months. the risks associated with having an open position on a single contract which is larger than the underlying bonds available for delivery may have played a role. in this context, the question has arisen of whether the amount outstanding of benchmark government bonds will remain sufficient to cover benchmarking needs, particularly as public deficits and debts should be reduced further in the euro area. already quite some time ago, some commentators had put forward the idea that the interest rate swap market, which, by international standards, is very well developed in the euro area, could at least partly play the role of benchmark. in fact, it is clear that the swap curve constitutes a widely used reference for the pricing of private sector debt instruments as well as the measurement of market risk on these instruments. with regard to derivatives instruments, i am confident that financial market institutions will come up with solutions to any possible shortage of the underlying government bonds. this development, in itself, would be welcome, as it would reflect a decline in government deficits and debt to levels in line with the stability and growth pact. for example, other instruments or pools of instruments may be used to provide the underlying price references for exchange - traded derivatives instruments. all in all, there are two main conditions to be fulfilled by instruments to serve as a reference in interest rate derivatives contracts. first, reference instruments should be traded in a market which is sufficiently deep and liquid to constitute a reliable and efficient price source. second, the requisite legal and institutional conditions should be in place to ensure that positions on derivatives may easily be either reversed prior to expiry, rolled over at the time of expiry or settled at the time of expiry by way of a cash payment. moving on to the second item in my short list of issues, let me now consider the challenges posed by the electronification of trading systems. this development has been most remarkable in the foreign exchange markets. automatic trading systems have very rapidly, over the course of the past three years, become the most widely used way of matching buy and sell orders. in the course of this development, a large part of the voice - based trading process has disappeared