Sound macroeconomic policies, institutional improvements spurred by EU-accession, increased trade and financial integration with the EU contributed to a rapid catching-up. Indeed, the year 2006 was the year with the highest GDP growth for the region since the beginning of transition. Today, the New Member States face the challenge of maintaining stability and sustainability of the catching-up path. Stability requires macroeconomic policies avoiding the accumulation of imbalances. Sustainability implies that past rates of high economic growth could be maintained in the future. To some extent, economic performance in the past decade could partly be related to a cyclical recovery after an initial slump. The recent dynamics were also generated by the massive reorganisation and privatisation of the economy after the fall of  4  BIS Review 115/2007  communism. This process triggered large FDI inflows providing both financial means and technological transfer. Today privatisation is almost complete and one has to look for new engines pushing forward the catching-up process. Currently, I see three main risks that have to be addressed as priorities by policy-makers: (i) (ii) (iii)  increased financial vulnerabilities, in relation with fast credit growth and mounting external imbalances ; rising inflation pressures which hurt external competitiveness; and the challenge of ensuring high future potential growth. . This third challenge belongs to the long-run as future economic developments will need to feed productivity growth beyond the dynamics of catching-up, through technological and production process innovation.

In this regard, entrant countries should pay specific attention to their current account deficits, which are referred to in the Protocol on the convergence criteria, because they have to be sustainable in order to ensure a smooth stay in ERM II and a good competitive position later in the monetary union. The economic rationale of the criteria is clear: membership of a monetary union entails abandoning monetary policy as a country specific adjustment tool. Diverging inflation rates become quickly unsustainable both because they create strong real exchange rates movements within the area and different real interest rates at the national level. In this context more inflation-prone countries would have too low real interest rates leading eventually to credit booms, domestic demand overheating, and loss in competitiveness and external deficits. Furthermore, in the absence of an independent monetary policy at the national level, fiscal policy becomes the main adjustment tool. In this context, fiscal criteria were designed in order to assess the ability of the government to conduct sound fiscal policies. Achieving strict and sustainable fulfilment of the Maastricht criteria involves in my view three elements. Sound fiscal and monetary policies are the minimum requirement in order to meet the nominal criteria. However, meeting the nominal criteria is not sufficient to assess that the economy of the candidate country is ready for monetary integration. The second element, a sufficient advancement in the process of real convergence, is related to the assessment of sustainability.