an increase ( albeit rather slight up to now ) in private consumption. all in all, germany ’ s economic development over the past six quarters or so has exceeded most analysts ’ forecasts – including my own, which was already higher than those of many market participants. against this favourable backdrop, there arises the question of what has actually been the main reason for the german economy rebounding so strongly, especially given its weak performance at the beginning of this decade. one crucial element in this success story has been wage moderation. wage moderation can be seen as the result of a learning process that was set in motion by two factors – the competitiveness problems of major industrial sectors, and stubbornly high rates of unemployment. this process was accompanied by enterprises ’ restructuring efforts, which have led to a falling level of corporate debt and a marked decline in the corporate sector ’ s net interest burden. both factors have played a major part in the regaining of german industry ’ s price competitiveness, which explains the resurgence of germany ’ s economy to a large extent. looking into the future, will today ’ s upward dynamics be of a lasting nature? will germany ’ s economy be maintaining its strong momentum in the quarters to come? my answer is probably “ yes ”. i think there are several reasons to be rather optimistic. we are currently experiencing an economic upturn with a favourable outlook. my positive assessment is based mainly on three likely facts. first : the global economy remains on its strong growth path. according to imf estimates, in 2007, global economic activity is expected to expand above its long - term average for the fifth year in succession. german enterprises are well placed to participate fully in this positive development of the global economy. in many countries, there is a large demand for high - quality capital goods, a market segment in which german enterprises have traditionally been strongly represented. seen in this light, exports are likely to continue generating major stimuli for the upswing in germany. second : with regard to the domestic economy, too, the prospects for a continuation of the upswing are promising. what is particularly important is that business investment is likely to remain a major factor underpinning economic activity. the current high level of utilisation of industrial plant capacity and a considerable need for replacement investment suggest that investment is still clearly on the up. in addition, external financing conditions remain favourable. moreover, firms ’ underlying sentiment is also very optimistic, which means that not just the recent hard data, but also soft indicators

##mediaries. this suggests that the shift of risk from financial intermediaries to investors in financial markets has provided for a better, more dispersed allocation of risk. this leads me to the third aspect, the implication of it - related change on the assessment and management of credit risk. banks may face a rapidly evolving credit risk environment. the credit quality of individual firms and the correlation of risk factors among sectors will change quickly in the continuing process re - positioning of firms. as a consequence, issues related to sectoral exposures - as in the case of telecoms - or an increasing reliance on credit risk transfer tools, would become increasingly relevant. this is even more important as increasing firm - specific risk may require larger portfolios and a greater range of exposures than before. another fundamental issue is that technological change challenges the reliability of backward - looking indicators ( such as default histories ) for credit risk assessment. this would call for an intensified monitoring of high - tech sector firms, but also of “ traditional ” borrowers, who may be vulnerable to mistakes regarding the choice of technology. let me conclude. innovation is beneficial - and it can be particularly beneficial in the case of a general purpose technology such as it. this being said, public policy should have a genuine interest in promoting entrepreneurial spirit and innovation. however, if one sees innovation as a process of creative destruction, it is also important to contain the destructive forces that may threaten financial stability. the general challenge in this respect is to properly understand and manage the risks involved in the financing of innovation. from the perspective of central banks in their responsibility for financial stability, the report highlights two areas where individual central banks and the central banking community as a whole play a part : • to employ the research capabilities and the knowledge of the financial system combined in central banks to analyse issues such as accounting and transparency, or the impact of increasing reliance on credit risk transfer through securitisation or credit derivatives. • to use central bank expertise for the monitoring of the financial system. changing linkages between the real and the financial sphere, and across the different segments of the financial system, in particular the re - allocation of risk across the financial system, underline the need for such systemic monitoring.