the exchange rate mechanism of the eu, for at least two years, and third, after the sustainable fulfilment of all the convergence criteria laid down in the treaty, the new member states will adopt the euro. throughout the process leading to the introduction of the euro, the new member states ’ economic situations and their policy strategies will have to be assessed on a case - by - case basis. the role of erm ii in this process, first, is to help participating member states orient their policies to stability and to foster economic convergence. second, participation in erm ii without severe tensions for at least two years is one of the convergence criteria. finally, entry into the euro area will be based on the sustainable fulfilment of the maastricht convergence criteria. these criteria will be applied to future euro area entrants in the same way they applied to euro area countries. it may take quite a while before new member states will be in a position to fully participate in emu. a fair share of realism is called for to avoid disappointment. in the long run, such an equitable and strict procedure will be to the advantage of all member states of the european union. in concluding, i would like to reiterate that in many respects, the euro has proved to be a driving force for europe ’ s continued political integration and economic reforms. the euro is regarded as an important token of identity for a modern, dynamic and open europe. the euro provides a stable anchor in unfortunately not so stable times. but the euro can only shield us from external shocks within limits. even though the euro has already triggered considerable fiscal and structural reforms, we must not relinquish our endeavors to make the euro area economy more efficient and productive.

the preservation of price stability over the medium term, somewhat counterbalances the multiple factors which currently have an adverse effect on economic activity. in the current environment of heightened uncertainty, stability has become an even more precious asset. as is well known, the eurosystem ’ s primary objective is to maintain price stability over the medium term, since price stability unambiguously represents a precondition for sustainable economic growth and rising employment in the long run. moreover, in times of severe tension, it is of the utmost importance that policymakers do not lose sight of their primary responsibility, so as to reduce uncertainty and strengthen confidence. consequently, the governing council of the ecb stands ready to act if necessary. and financial markets can rely on the provision of sufficient liquidity even under exceptional circumstances, as was demonstrated in the past. as to military action in iraq, the impact of this confrontation on the global economy can vary significantly in scope and size, depending on the extent and duration of the conflict. it is therefore not possible at this juncture to conclusively assess the short and medium - term implications for the euro area. the euro area has established itself as a stable monetary anchor in the global economy. that notwithstanding, one has to acknowledge that much remains to be done. the stability and growth pact obliges euro area member states to achieve budgetary positions close to balance or in surplus in a sustainable manner, in order to minimize the risk of breaching the budget deficit criterion of 3 % of gdp in the course of a business cycle. sound budgetary positions not only create enough leeway for automatic stabilizers to take full effect over the cycle, they contribute to reducing the debt - to - gdp ratio and consequently the interest burden for governments, increase investors ’ confidence in the euro area and therefore keep interest rates lower than they would otherwise be. moreover, demographic developments make it imperative to bring public finances into structural balance or surplus. even though in most countries the current fiscal policy stance, as envisaged in the updated stability programs, strikes a reasonable balance between letting automatic stabilizers operate and seeking further consolidation where needed, some countries ’ current consolidation plans lack ambition, particularly over the medium run, once the current slump has in all likelihood been overcome. it is necessary that all euro area countries live up to their obligations in full. fiscal policy must be part of a comprehensive and growth - oriented strategy, focusing - as a rule - on restraining the volume and on improving the structure of public expenditures