, which ultimately resulted in a foreign exchange crisis. • maybe we should see the achievement of eu membership as a shock in its own right. after all, the considerable administrative and financial burden of adopting and complying with the acquis communautaire and of the confrontation with competition in the single market constitute a major change to economic functioning. this calls for a flexible policy. given these specific challenges to policy posed by transition and convergence, it is worth noting that those accession countries which have made the most progress, such as hungary, the czech republic and poland, have switched to more flexible exchange rate regimes in recent years. this allows them to exercise greater influence on real appreciation and strong capital inflows, to reduce potential speculative attacks on the currency and to partially absorb shocks. policy challenges and participation in emu what is the relationship between the challenges posed by structural and real convergence and participation in economic and monetary union? as you may know, countries acceding to the european union may begin to consider changing over to the euro after two years. the question arises whether under the given circumstances early introduction of the euro is always advisable. it must be remembered that the instrument of exchange rate flexibility is no longer available to countries which have joined the monetary union. there is furthermore a considerable chance that a new member state eager to change over to the euro quickly may find the euro area - wide monetary conditions incompatible with its specific circumstances. on the one hand, an accession country which has been successful in its efforts to catch up will temporarily face structurally higher inflation levels. on the other, such a country ’ s economic weight is too insignificant to affect the ecb ’ s monetary policy. in such a situation, negative real interest rates, overheating of the economy and erratic economic cycles may occur, making very heavy demands on macroeconomic management and the flexibility of the economy, notably the labour market. this brings us back to structural convergence and the requirements and implementation of the copenhagen test. new member states in the european process of policy coordination given these structural and real challenges to policy, it would seem advisable to continue to comply with the essence of the copenhagen test following accession to the eu. this would give the accession process the necessary flexibility if a big bang scenario were actually enacted, so that transition periods might be considered for specific parts of the acquis communautaire. in fact, such an approach would also allay the fears voiced by the scientific council for government policy regarding potential

council of laeken indicated in december that eight to ten countries will be joining the eu as from 2004. the chances of a big bang scenario, with all accession countries except bulgaria and rumania joining at the same time, has thus gained in probability. politically, this would be the preferred route, eliminating tensions between countries joining soon or at a later stage and facilitating the ratification process of individual accession treaties. on the other hand, a big bang scenario should not conceal the persisting – and sometimes substantial – structural differences between accession countries. there is a correlation between potential problems in the economic structure and the stage of transition reached. the consequent specific policy challenges will continue to demand attention even after accession, and notably when participation in the monetary union is considered. policy challenges for accession countries on the road to convergence let me begin by pointing out that over the past ten years the countries in central and eastern europe have engaged in a highly successful catching - up exercise. painful reforms were enacted, often attended by rampant unemployment. the necessary institutions, such as central banks, were built up from scratch. at the same time, the transition process from a centrally planned to a market economy usually proved more laborious than expected. the economic downturn was such that only a few countries have managed to regain the gdp level recorded before 1990. the growth potential may exceed the average in the european union, but so far the margin has been slim. for instance, the czech central bank puts the potential growth rate of the czech economy at 2 - 3 % per annum. income differentials vis - a - vis the european union will consequently persist for some time to come. in fact the policy challenges of the accession countries lie in furthering structural reforms aimed at raising the growth potential. economically, structural and real convergence towards the eu interact. it is a lengthy process, involving such measures as introducing free enterprise and corporate governance, as well as setting up social security systems and fighting abuse and corruption. in this context, the commission recently announced an action plan intended to boost the institutional capabilities of the accession countries. looking at my own field, i see that banking supervision will need to be stepped up. in general, the financial sector is not developing in line with the economy as a whole, and plays no more than a limited role in the financing of local enterprises. the capitalisation rate of banks and share / bond markets in poland and hungary is less than a third that in the eu. financial intermediation must clearly be stimulated if