lucas papademos : economic outlook in the euro area statement by mr lucas papademos, vice - president of the european central bank, at the 2008 asia - europe ( asem ) finance ministers ’ meeting, jeju, korea, 16 june 2008. * * * introduction it is a great pleasure for me to participate in the asem finance ministers ’ meeting. in my statement, i will focus on the economic outlook in the euro area, with special emphasis on inflation prospects and risk, the monetary policy stance of the european central bank ( ecb ), recent financial market developments and our assessment of the outlook for financial stability. economic outlook the pace of economic activity in the euro area is expected to decelerate in 2008 and 2009 from the robust 2. 7 % gdp growth rate recorded last year. the eurosystem staff projections, published on 5 june 2008, foresee annual real gdp growth in the range between 1. 5 % and 2. 1 % in 2008, and between 1. 0 % and 2. 0 % in 2009. recent growth forecasts for the euro area by the european commission, international institutions and organisations and the private sector are broadly in line with the eurosystem staff projections. all in all, our latest assessment, based on the macroeconomic projections produced by the staff of the eurosystem, and our analysis of the most recent information, from data and survey indicators, confirms the expectation of moderate but ongoing economic growth. both domestic and foreign demand are expected to support gdp growth in 2008. the resilience of global economic growth, which benefits from the robust economic activity in emerging market economies, should support euro area exports. domestic factors, however, are expected to contribute the largest part of euro area growth in both 2008 and 2009. in particular, non - residential private investment is expected to provide support to economic activity, as capacity utilisation remains high and profitability has been sustained in the nonfinancial corporate sector. this outlook for economic growth is surrounded by continuing high uncertainty and downside risks prevail. the financial market turmoil could have a more adverse impact on the real economy than currently anticipated. in addition, further unanticipated increases in energy and food prices could have dampening effects on consumption and investment. there are also risks stemming from the possible emergence of protectionist pressures and from the still large, though declining, global imbalances. turning to price developments, the outlook for price stability in the euro area has deteriorated

. technological innovations can greatly improve the quality of medical care and can, in some instances, reduce the costs of existing treatments. but because technology expands the set of treatment possibilities, it also has the potential to add to overall spending - in some cases, by a great deal. other sources of uncertainty - for example, the extent to which longer life expectancies among the elderly will affect medical spending may also turn out to be important. as a result, the range of future possible outlays per recipient is extremely wide. the actuaries'projections of medicare costs are, perforce, highly provisional. these uncertainties - especially our inability to identify the upper bound of future demands for medical care - counsel significant prudence in policymaking. the critical reason to proceed cautiously is that new programs quickly develop constituencies willing to fiercely resist any curtailment of spending or tax benefits. as a consequence, our ability to rein in deficit - expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. thus, policymakers need to err on the side of prudence when considering new budget initiatives. programs can always be expanded in the future should the resources for them become available, but they cannot be easily curtailed if resources later fall short of commitments. i fear that we may have already committed more physical resources to the baby - boom generation in its retirement years than our economy has the capacity to deliver. if existing promises need to be changed, those changes should be made sooner rather than later. we owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. they need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals. addressing the government's own imbalances will require scrutiny of both spending and taxes. however, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. the exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. in the end, i suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs. our current, largely pay - as - you go social insurance system worked