Nevertheless, several risks should be highlighted: that of a sudden drop in US consumption in the wake of the problems in the property market; that of a sharp increase in commodity prices; that of a return to volatility on financial markets, after several exceptionally calm years; and, linked to the latter, that of a disorderly adjustment of exchange rates triggered by the build-up of international imbalances. The second concern relates to the extremely rapid growth of monetary and credit aggregates in the euro area. The annual growth rate of M3, which was below 6% in 2004, gradually accelerated and currently exceeds 10%. Loans to the private sector also continue to expand by more than 10%. Structural changes in money and credit demand – linked to financial  BIS Review 92/2007  1  innovation – may partly account for this acceleration. However, these developments must be closely monitored in view of their implications for monetary stability and that of financial systems. During 2004 and 2005, household borrowing was the primary source of credit growth; in 2006, this was replaced by lending to enterprises, in line with the economic recovery and the rise in – often highly leveraged – company buyouts. The strong profits and financial soundness of firms facilitate and sometimes encourage increased borrowing, which is then presented as “optimising” their liability structure. But balance sheets are weakening and difficulties could appear in the event of a turnaround in the business cycle.
These recent initiatives should be pursued in order to expand the poles of competitiveness, attract researchers and companies, and integrate SMEs and startups that do not benefit from the resources available under these innovation drives. In the main, these reforms are currently underway or being examined in our country. It is thus becoming possible to create lasting conditions for stronger and more employment-rich growth. Public finances Despite the partial consolidation seen over the past two years, public finances remain weak and call for great vigilance. Following the reform of the Stability and Growth Pact, France made a number of commitments. These commitments have been made for a reason and the credibility of the efforts undertaken elsewhere on the European stage depends on their respect. France, which is the euro area’s second largest economy in terms of size, naturally aims to play a key role in this area in order to enhance and develop “economic governance”. Come what may, it is in the interest of France’s economy and citizens to consolidate public finances. The role traditionally attributed to public spending and welfare is to contribute to a better allocation of resources in the economy, foster the desired redistribution of income and, if the conditions are in place, help stabilise economic cycles. These three functions are more difficult to realise in a globalised economy that reduces leeway and creates, in practice,  BIS Review 92/2007  5  latent and permanent competition between tax systems and public policies. A number of major imperatives thus emerge.