and its example of fiscal discipline. now the objective of joining the euro has been achieved, and, in addition, germany has lost its leading role and the markets react less to fiscal laxity. instead of leadership towards clear objectives we have recently seen the opposite - the political exploitation of the gap between the national and european level. the requirements of the pact are blamed on heartless “ accountants in brussels ”, and when a majority puts narrow national political interests first the agreed rules become moot - “ peer pressure ” becomes “ peer protection ”. incorrect facts are more or less deliberately sent to the commission ahead of sensitive elections. in fact, a recent study by the ecb shows that the closer a country comes to an excessive deficit, the more likely it is that the forecast the government presents officially will later turn out to be wrong. there is a strong bias towards unrealistic optimism once a country ’ s deficit approaches 3 per cent of gdp. let me say something in this respect about the new member states. it is all too apparent that the collapse of germany ’ s leading role in fiscal discipline has also set a bad example for some of the larger new member states. given that public finances have deteriorated so much in poland, hungary and the czech republic during the first years of this century it is fortunate both for themselves and for the euro zone that these countries have postponed joining erm ii and the attempt to rapidly adopt the euro. had they tried and locked their currencies within erm ii they may well have stayed in that position for a long time, becoming in the meantime targets for speculation - as their poor public finances would have lent little credibility to their overall economic policy. this was sweden ’ s experience with the combination of a currency peg and deteriorating public finances in 1991 - 1992. but now there is another danger. given that the target of imminent euro adoption is gone, and the large euro zone nations do not provide real leadership on fiscal soundness, there is less incentive for some of the new member states to stick to the consolidation of their public finances from today ’ s deficits above 5 per cent of gdp. the consolidation plans are already too dependent on a continued upturn. whether in the old or new member states, there is an additional problem, as we are entering a period of intensifying structural changes. old industrial patterns in europe are being changed when confronted with both the boost to productivity from it, as partly realised since the late 1990s in the us, and globalisation and

to this, the american example does show that a judicious upward adjustment of the interest rate definitely can contribute to good economic effects provided the sustainability of growth is also taken into account. i do not cite the case of the united states to imply that the riksbank has already decided to make further rapid interest rate increases in the near future. that is not how we work. those who follow what we do know that the foundation for monetary policy measures is our inflation forecast. at the time of the latest repo rate increase the riksbank ’ s executive board judged that inflation is rising only moderately and will be approximately in line with the target in one to two years ’ time. it must be borne in mind, of course, that new information may alter our assessment and that our time horizon in the upward phase is moving ahead. in the short perspective, however, things look a little different. the rate of inflation may actually tend to slacken this spring, partly due to effects of the deregulation of telecommunications. but as i said, the perspective for monetary policy lies further ahead. forecasting is difficult the difficulty for the riksbank lies in constructing forecasts for the period - usually one to two years ahead - that is generally regarded as the time lag before an interest rate adjustment has its full effect. anyone with some experience of forecasting knows how difficult this can be and is aware that forecasts not infrequently miss the mark. we could in fact attach more importance to the current as opposed to the forecast future rate of inflation but that would probably call for rather large repo rate adjustments in order to keep inflation stable around the target. such an approach would result in sharp fluctuations in real economic activity, which would naturally not be desirable. are there any developments which suggest that the time lag for effects of interest rate adjustments may be becoming shorter? more and more home owners are switching from fixed to variable mortgage rates, which may indeed tend to speed up the impact of monetary measures. but there are other factors which may be working in the opposite direction, towards a longer time lag. one example is the costs involved in altering prices. one of the benefits of low and stable inflation is precisely that it facilitates contracts with a longer duration. insofar as the establishment of a low - inflation regime has led to price movements being more restrained for this reason, it follows that it will take longer for monetary policy measures to impinge on prices. for monetary policy ’