These relate to the high levels of public and foreign debt and to the high dependence on foreign capital, which advise perseverance in maintaining macroeconomic stability and in furthering structural reforms, especially those aimed at strengthening the institutional framework and the respect for property rights One salient aspect, in my view, which arises from the examination of the international situation is the fact that the firming of the economic recovery did not contribute to correcting the external imbalances between the main regions. On the contrary, despite the marked depreciation of the dollar, both the US external deficit end the surplus of Japan and the rest of Asia increased, while the slight surplus in the euro area hardly changed. Possibly, the deprecation of the dollar may not yet have had a corrective effect on foreign trade flows since, as we know, this tends to come about with a considerable delay and, in the short term, the exchange rate deprecation may even lead the deficit to widen. But the scant impact of the dollar depreciation on the current-account balances of the main areas appears also to be related to the asymmetry in the reaction of the main currencies: while much of the nominal effective depreciation of the dollar in 2003 was bilaterally against the euro, the Asian economies and, to a lesser extent, Japan, checked the rising trend of their currencies by means of heavy intervention on the foreign-exchange markets which has contributed to increasing their already high levels of reserves even further.
In the past decade major headway has been made in many countries in areas such as the downsizing of the public sector, the efficiency of the tax system and, more unevenly, the workings of markets. That should not prevent us from acknowledging the weaknesses the European economy still exhibits. In particular, in a more competitive international environment, the continuing rigidities in goods and labour markets and the absence of sufficient incentives for innovation and the incorporation of new  2  BIS Review 39/2004  technologies are inhibiting investment in Europe, to the beneft of other more dynamic geographical areas. As a result, growth potential is being significantly impaired. Likewise, population trends in Europe are exerting growing pressure on the financial viability of the current public arrangements for social security and health-care. That tends to make those aspects of labour regulation and tax systems that act as a barrier to joining the labour market and to the reduction of the dependency ratio even more onerous. It may thus be the case in the current circumstances that agents perceive more clearly the potentially negative influence on their future income of structural deficiencies, and that this is inhibiting their propensity to spend. Accordingly, defining and boosting the reform agenda, in line with the commitments made at the Lisbon and Barcelona Summits, is not just necessary for ensuring greater sustainable growth in the medium tend; it is also a crucial requirement for improving agents’ confidence and, thereby, contributing to the dynamism of activity, likewise in the more immediate term.