In the last decade, policymakers around the world have gained better appreciation of the increasingly important role that the financial system plays in the transmission of monetary policy. As Jeremy Stein puts it, “monetary policy is fundamentally in the business of altering risk premiums.” [3] Accommodative monetary policy reduces risk premiums and can lead to unsustainable credit growth and asset price increases. Correspondingly, monetary policy tightening can trigger a sharp reversal in sentiments and risk premiums, which can impair credit supply and trigger financial failures. Two, capital flows and exchange rates cannot be ignored in macro policy settings, especially in emerging market economies. In advanced economies, capital flows and exchange rate movements are generally viewed as equilibrating mechanisms outside the remit of macro polices. But for emerging market economies, they can spell serious macroeconomic and macro-financial trouble. Capital flows can fuel domestic credit and asset price bubbles. Capital flows can induce exchange rate fluctuations that are disconnected from macroeconomic fundamentals. In the face of large and volatile capital flows, a freely floating exchange rate can become a shock amplifier rather than a shock absorber. Studies by both the IMF and BIS find that exchange rate movements have perverse, destabilising macroeconomic and financial effects in emerging market economies, in contrast with their stabilising effect in most advanced economies. [4] Capital flows can compromise the monetary policy latitude of emerging market economies. Studies show that their monetary policies respond to movements in US interest rates and exchange rates, besides their own domestic macroeconomic conditions.

Convergence Programs of the new Member States should include ambitious Medium Term Objectives to ensure that not only the Maastricht criteria are met, but most importantly, the emergence of excessive deficit situations is avoided and the risks of taking recourse to exchange rate adjustments after joining the ERM2 (and, eventually, the euro area) are minimized. The well functioning single market for all goods and services, including infrastructure networks, as well as pursuing the National Reform Programmes in the context of the reinforced Lisbon agenda is the other pillar for the success of the euro area and for the new Member States in particular. Estonia has been a de facto member of the euro area since the inception of its independent currency in 1992. Fixing the local currency to D-mark, and later to the euro meant that the monetary policy decisions were not made in Estonia. Estonia's currency board regime implies prudent fiscal stance that has been largely adhered to since 1992, resulting in our general government having accumulated a relatively large net asset position of around 10 percent of GDP. A solid budgetary position and early deregulation of product and capital markets implies that Estonia has been well placed to absorb both positive and negative shocks during the last 15 years. Deregulation and reform in preparation of the EU membership has allowed us to fully integrate our economic and financial systems with the Single Market. However, that kind of approach requires, in today's conjuncture, forward-looking structural reforms in almost all EU member states, e.g.