The euro area experienced a marked slowdown in economic growth from 3.5 per cent in 2000 to 1.5 per cent in 2001, prompted by a series of shocks common to the OECD area including the effects of the September 11 terrorist attacks in the US and a surge in oil prices in 1999-2000. However, an economic recovery is now underway and should gain momentum during the course of 2002. The labour market continues to show remarkable resilience. Inflation has remained above the 2 per cent target level since early 2000, but so far this does not appear to have compromised the monetary policy credibility of the European Central Bank. There is a need for further financial market integration with remaining entry barriers addressed. The current structure of regulation and supervision needs to be reviewed with co-ordination processes streamlined. This should help foster progress towards structural reform and help in absorbing country-specific shocks more smoothly.