Thus, in order to satisfy the banking sector’s demand for liquidity buffers on particular days and for fulfilling reserve requirements earlier in the maintenance period, the ECB has (1) occasionally provided liquidity to the market through exceptional operations, 2 and (2) it has changed the time patterns of liquidity provision within the reserve maintenance period. In addition, from the start of the market turmoil the ECB has intensified its communications with market participants so as to indicate its alertness and readiness to act in order to reduce the volatility of the very short term interest rates around the target rate and to contribute to the smooth functioning of the money market. For instance, last Friday we published a press release pointing out that the ECB’s Governing Council has noted that market participants are concerned about conditions in the euro money market in connection with the upcoming end of the year; and announcing the decision to lengthen the maturity of the main refinancing operation settling on 19 December 2007 to two weeks so that it matures on 4 January 2008. In this refinancing operation, we will aim to satisfy the banking sector’s liquidity needs for the entire two week period, covering both the Christmas holidays and the end of the year. This example provides a good illustration of the importance that the ECB has attached in recent months to intervene in money markets through a combination of flexible liquidity management operations and regular communications.
Labour market policies must seek to facilitate the shift of workers from domestically-oriented sectors facing weak demand to export-oriented sectors, and from depressed regions to resurgent ones. And wages must become more flexible, so that firms can ride out cyclical downturns without losing competitiveness. 47. Next, tax reform. The debate needs to shift from the rate of taxation to the structure of the tax system. The US could do with a broader tax base, simpler tax codes, and less exemptions. In Europe, similarly, there are opportunities to increase the efficiency of the VAT system including in broadening its base. 48. Lastly, pension reform. Government spending in many advanced economies needs to be overhauled in the face of impending demographic challenges. Effective pension reform requires a judicious combination of increases in the statutory retirement age and reductions in the generosity of benefits, with the balance varying from country to country. Emerging Asia: domestic demand, financial deepening, productivity 49. In Emerging Asia, the key structural reforms are in the areas of boosting domestic demand, deepening financial markets, and raising efficiency and productivity. 50. Boosting domestic demand is perhaps the most important medium-term imperative for Emerging Asia. Public and private sector deleveraging in the advanced economies has at least dented, if not extinguished, the export-powered growth model that has been largely responsible for the “Asian Miracle”. Reforms are needed to stimulate private consumption in some Asian economies, and investment in others. 51. In China, the issue is consumption, not investment.