financial linkages across countries, the decoupling in terms of growth between advanced and emerging economies that was apparent after the first quarter of 2009, disappeared. needless to say, the situation required immediate policy response by authorities. in the united states, given that entrenched political positions made it impossible to make meaningful progress in the fiscal front, the federal reserve continued to carry the brunt of the adjustment, as it expanded its accommodative monetary policy stance, using extensively quantitative easing combined with prospective interest rate guidance. all this with the objective of taking the pressure off the bond market, flattening the yield curve and by these means stimulate aggregate demand and employment. the situation in europe, at least from my point of view, was, and still is, by far more challenging. the main reason was that the drastic deterioration of the fiscal position and the health of the banking system in some peripheral countries in the eurozone elevated to hazardous levels what has been called fragmentation risk, which in plain english means the risk of a breakdown of the european currency union as we know it. this led to sudden stops in the financing of some sovereigns and their banking system, which in a way triggered massive capital outflows. all this in turn fed back into higher fragmentation risks, creating a very pervasive vicious cycle. the materialization of sudden stops in the eurozone caught many by surprise. this type of phenomenon was supposed to happen only in weak emerging markets, not in mature economies protected by a supposedly strong anchor in the form of a credible exchange regime, i. e. the european currency union. but the problem precisely was that the perception of a strong external anchor made it feasible for some countries to let their guard down, manifested in policy complacency in the good years when huge and persistent net capital inflows were the norm. this situation resulted in : a ) unprecedented external indebtedness in some countries, and b ) banking institutions with bloated balance sheets supported by very bis central bankers ’ speeches fragile funding. this combination of factors made the sudden stops in some european countries much more pronounced than the ones experienced in previous decades in latin america or during the asian crisis in the nineties. the financial sector and sovereign distress in europe demonstrates once more that an exchange rate regime per se cannot be a substitute for policy discipline. as a matter of fact, the problems faced by europe since mid - 2011 are not different from the ones resulting from a speculative attack against an

for fiscal policy, as long as it is in balance over the cycle. yet there are still risks in rushing to meet all of the convergence criteria – especially if emu membership cannot realistically occur for several years. there is a discussion in academic circles on whether very low inflation figures, that is to say, much lower than most candidate countries have now, are really compatible with rapid growth and a fixed exchange rate. the export sector's rapid growth creates pressure on the domestic economy through the'balassa - samuelson'effect and raises domestic prices, creating a'natural'inflation. to then artificially press down inflation to very low levels could be overly ambitious. an even greater risk for both candidate countries and the eu could be to try to transfer the entire system of subsidies and taxes applying in several richer eu countries to central and eastern europe. most of the candidate countries already have higher tax levels and a greater degree of state influence in the economy than the majority of countries in the world at their welfare level, and much more so than in countries such as taiwan and south korea, which have succeeded in rapidly attaining a higher standard of living. to further increase the tax pressure and subsidy levels would risk subduing growth. here i should like to highlight a warning example and a good example. the warning example is the former east germany. it is often said that it was the fact that the east german mark was replaced at parity by the west german mark that led to the economic difficulties in the former gdr. this perhaps was not the decisive factor ; rather it was the fact that wages and subsidy levels, together with the rest of the west german system, were transferred to a much poorer economy, which needed much greater room for manoeuvre. despite massive investments, the new eastern lander suffered a recession and mass unemployment. the positive example is actually none of the strong economies in eastern europe, not estonia, poland or hungary, but ireland – which made good use of all opportunities to compete with its cheaper and increasingly well - educated labour force after eu membership, while gradually reforming its tax and subsidy system. during the 1990s, ireland doubled its growth rate from just over 3. 5 per cent a year to over 7 per cent – well in line with the most dynamic asian economies – and gdp per capita, which was 40 per cent below the eu's average as recently as in the 1970s, is now above. we must hope for the sake of both the eu and the candidate countries