There are now good prospects for a global recovery. Most indicators point towards faster global growth in the second half of the year, gathering pace in 2004. Upside and downside risks to the outlook appear more balanced than they were in the Spring. Geopolitical tensions have eased but they have not completely disappeared as the relatively high and volatile oil prices demonstrate. On the positive side, a widespread recovery could have mutually reinforcing effects, in particular through stronger growth in world trade. At this juncture, there is therefore a need for policies to shift their focus towards long-term sustainability, in order to: keep inflation low, reduce public debt levels, prepare for ageing and increase economic growth potential. Sound policies in all countries should facilitate a gradual and orderly adjustment of global current account imbalances.

Confidence in the euro area is gradually beginning to pick up, with early signs of a resumption in growth. Activity should rebound in the second half of 2003, as a result of stronger world demand, better financial conditions in the corporate sector and improved confidence. GDP growth is expected to be around 0.5% in 2003, but, in the course of 2004, should reach its potential rate. The weakness in euro area activity reflects a combination of cyclical and structural factors. Growth was dampened by a series of external shocks, including subdued international trade growth, low business and consumer confidence, the delayed effects of the stock market slump, and over-investment in the 1990s.

At this juncture, it is important to implement policies that will reinforce growth momentum. Interest rates are at historically low levels and monetary policy remains growth-supportive. The recent evolution of the euro exchange rate has brought it back to its long-term average.

The EU fiscal policy is guided by the Stability and Growth Pact (SGP). The two key rules of the SGP are to run a balanced budget on average over the cycle and not to breach the 3 % of GDP ceiling. This implies the free play of automatic stabilisers, provided that the fiscal deficit does not exceed 3% of GDP. Furthermore, in those Member States with high budget deficits, cyclically adjusted budget deficits are expected to improve by at least 0.5% of GDP a year. This policy, combining short-term flexibility with credible medium-term adjustment, will support growth by positively influencing expectations, improving consumer confidence and supporting monetary policy. In the light of the challenge stemming from ageing populations, long-term fiscal sustainability is a key element of the EU fiscal policy approach and is reflected in the SGP's medium term objective that budgetary positions should be close to balance or in surplus on average over the cycle. Also from this perspective, the necessary fiscal consolidation should be implemented.

Economic developments over the last couple of years have shown that growth in the EU has lacked internal dynamism. Further structural reforms at a faster pace are crucial for creating a more dynamic knowledge-based economy in Europe and for increasing the potential rate of growth, as envisaged by the Lisbon agenda. The Italian EU Presidency and the European Commission have recently launched a growth initiative, the objective of which is to support medium-term growth and integration by increasing overall investment in Trans-European Networks (TENs) and major research projects.

The EU is close to creating a comprehensive legislative framework for an integrated and efficient EU financial market. Important agreements have been reached this year with the adoption of key directives on market abuse, pension funds, prospectuses and the taxation of savings income. The Financial Services Action Plan (FSAP), which is the approach to create an integrated financial market, is thus well on the way to completion within the 2005 deadline. Its implementation will reinforce the safeguards for financial stability by paving the way for a common regulatory framework and convergence in national supervisory practices. This will be facilitated by the streamlining of EU regulatory procedures. The efficiency gains from financial integration will feed through to the EU economy, with a positive knock-on effect for output growth and employment creation.

Recovery in the United States has been gaining momentum recently, with consumer spending advancing strongly and business investment picking up. Expansionary macroeconomic policies have contributed to the rebound. Strong underlying productivity growth has thus far held back employment growth in the current recovery, but at the same time it bodes well for future growth prospects. However, the large and continuously growing current account deficit that accompanies the general government deficit give rise to mounting concern about a disorderly correction, that could dampen global growth eventually.

Growth in Japan in the first half of the year was stronger than expected, with corporate investment and private consumption being the main drivers. Indicators and confidence surveys suggest that output expansion may continue in the second half of the year. Deflationary pressures may also be abating. To sustain the growth momentum, it will be important to press ahead with the structural reform agenda, particularly in the corporate and banking sectors. As in Europe, a medium-term fiscal consolidation package need not necessarily be negative for growth.

The historical process of enlargement of the EU towards the east has entered a final stage. The 15 EU Member States have signed the Accession Treaty with ten prospective Members (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) and ratification is proceeding well. Accession is due for completion in May 2004, when the acceding countries will become full Members. Bulgaria and Romania are also preparing for accession to the EU. They are expected to enter by 2007. The EU has committed to start negotiations with Turkey once the political criteria for accession have been fulfilled. This perspective should help to anchor its current stabilisation and reform efforts.

EU enlargement will generate momentum for further co-operation between the EU and its new neighbours to the East and South. The Wider Europe Strategy aims to offer these countries the prospect of closer integration with the EU, with further access to the internal market. Beyond this economic dimension, the goal is the creation of an area of shared prosperity and common values of democracy, liberty, respect of human rights and fundamental freedoms, and the rule of law.

The implementation of prudent adjustment policies has undoubtedly contributed to improved economic and financial conditions in Latin America. The successful voluntary debt exchanges recently conducted by a few countries also suggest that debt restructuring can in some cases make a significant contribution to restoring financial stability. Nonetheless, further efforts are needed to address the problems facing a number of countries, often reflecting weak fiscal positions, heavy debt burdens and political instability. The gradual recovery and stabilisation in Argentina and the reforms being implemented in Brazil should create a platform for higher, more sustainable growth.

In the Middle East, some progress has been made with the implementation of economic reform programmes. However, Middle Eastern countries should enhance their efforts to establish peace in the region and carry out bolder reforms. Better governance and increased accountability of public policies would contribute to improving the investment climate. The Commission reaffirms its determination to assist countries committed to peace and reforms, including those that fall in the scope of the Wider Europe Initiative.

The European Community (EC) development policy remains geared towards eradicating poverty in developing countries by promoting sustainable development and the full integration of developing countries into the global economy. The EC intends to take further steps to untie its own aid. It is also committed to enhance the complementarity and the overall consistency of its aid, both within the EU and in relation to other international donors. The EU remains committed to the Poverty Reduction Strategy Paper (PRSP) approach, and continues to support the Heavily Indebted Poor Countries (HIPC) Initiative, to which the EC has pledged more than €1.6 billion, in addition to contributions from individual EU Member States. Participation of all creditors is crucial for the effectiveness of the initiative and the EC encourages those who do not yet participate to take immediate action to do so. The Commission also believes that increased attention should be devoted to the issue of debt sustainability after HIPC relief.

Following the recent setback to the WTO trade negotiations at the Cancùn Ministerial meeting, the EC remains fervently committed to a strong rules-based multilateral trading system. The EC will continue to work in this direction within the WTO and hopes that the Doha Development Agenda (DDA) will be put firmly back on track forthwith. Notwithstanding the setback at the Cancùn Ministerial, the EC will continue its path of agricultural reform, and will continue to change farm policy to make it more competitive, trade-friendly and more in line with the interests of developing countries. The EC remains committed to supporting developing countries' efforts to integrate into the global trading system. Further trade liberalisation and improved multilateral trade rules would not only provide a significant boost to global economic growth prospects, but would also improve the economic situation in developing countries.

The EC plays a central role in the international fight against financing terrorism and the abuses of the international financial system. At the EU level, effective legislation against money laundering and terrorist financing has been in place for some time. It is currently being reviewed in order to fully implement the enhanced international standards as laid down in the recently revised Recommendations of the Financial Action Task Force's (FATF). It is crucial to make the FATF Special Recommendations on terrorist financing more operational and to implement these standards worldwide. The intensified collaboration between the Fund, the World Bank, the FATF and the UN is essential to these ends. The EC also assists third countries in their efforts to expand and strengthen their capacity to combat financial abuses. Co-operation in the fight against terrorist financing is becoming a standard feature of new trade agreements negotiated between the Commission, Member States and third parties.

The Commission welcomes the important steps that have recently been taken to strengthen the effectiveness of IMF surveillance. There has been substantial progress with respect to the use of Collective Action Clauses (CACs) in international sovereign bonds. Substantial efforts have been made by a number of emerging markets to include CACs in their bond issues, while EU countries have been issuing bonds in line with the EU commitment. The Commission welcomes the efforts underway to develop a voluntary Code of Conduct for creditor-debtor relations, which could go some way towards facilitating more orderly and expeditious resolution of crisis. However, improving the crisis resolution framework will require further progress on certain features of the Sovereign Debt Restructuring Mechanism (SDRM), such as the aggregation of claims and treatment of the debt stock.