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The economy in the euro area has turned around. While GDP stagnated during the second half of 2001, there are more and more signs that output will increase considerably in the first half of this year. All in all, the slowdown has not been very pronounced. One indication for this is that in 2001, the year of the downturn, unemployment remained more or less constant. The factors which led to the cyclical slowdown have turned around and now stimulate economic activity: Monetary policy has become expansionary, oil prices have dropped substantially, and there is a recovery in the rest of the world. Key interest rates in the euro area have remained unchanged since early November 2001. Real short-term interest rates are well below their historical average. Therefore, economic activity is stimulated by monetary policy. Until spring 2003, the ECB will raise key interest rates to the neutral level which should prevail when the output gap is closed and when inflation is at its target; this neutral rate lies between 4 and 4.5 percent. Money growth has exceeded the reference value of 4.5 percent for M3 considerably for several months. This increase implies that the velocity of money shows an unusually large deviation from its trend. According to the judgment of the ECB, the demand for M3 has become unstable only in the short run due to special factors. If this judgment is correct, money growth will slow down markedly in the coming months. As a consequence, velocity will return to its trend without an increase in inflation. This implies, however, that the expected slowdown of money growth should not be used as an indication that monetary policy is tight and needs to be loosened because the deceleration of M3 growth is nothing but a normalization. Fiscal consolidation has been insufficient in several countries. Governments in Germany, France, Italy and Portugal should begin to pursue a strict consolidation course. Empirical evidence shows that countries that undertook credible con