to the commission ahead of sensitive elections. a study by barclays capital shows that during the years 2000 - 2003 growth projections were overestimated by 1. 5 percentage points on average each year by the euro area countries, leading to fiscal balances turning out worse than expected on average by about 1 % of gdp per year. in fact, a 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 % of gdp. the same result was indicated in a study by lars jonung and martin larch. what challenges does the future hold? 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. this despite the fact that germany now appears to be in the process of correcting its deficit. given that public finances did deteriorate 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 area that these countries have postponed joining erm ii and the attempt to rapidly adopt the euro. they have made clear that their government finances must be in order before the process of joining the euro area begins. 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 area 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. this is especially obvious for hungary, where the deficit was 7. 5 per cent in 2005 and is, according to present plans, expected to increase to around 10 % this year. for poland and the czech republic the deficits will stay at the present level of around 3 % in the coming two years. whether in the old or new member states, there is an additional problem, as we are entering a

deadline for correcting the excessive deficit. normally, the timeframe will continue to be 2 years after the excessive deficit occurred. however, the revised stability and growth pact now allows for the possibility to extend this timeframe to 3 years. in my view, this is a positive change since the earlier system in practice meant that countries only had a few months to correct an excessive deficit, and this did not increase the respect for the stability and growth pact. however, in addition, a possibility to revise the initial deadline has been introduced which creates a risk for an excessively prolonged edp. to summarise, some of the changes in the stability and growth pact thus go in the right direction and might enhance the discipline, while other changes introduce a flexibility that could be abused. as always, the proof of the pudding is in the eating. so far, budget plans have not moved in the stricter direction despite the fact that growth prospects have improved. the yearly average deficit for the euro area will stay at about 2. 4 % of gdp for the next couple of years according to present plans. the structural deficit is expected to improve only marginally between 2005 and 2006 – from 2. 2 to 2. 1 per cent – despite a strong economy. it is important to stock up now ready for future times with lower growth. the recovery and consolidation of the eu ’ s largest economy, germany, is of central importance in this context. why have we not seen the problems earlier? the question is why we didn ’ t see the problems in the stability and growth pact from the beginning? perhaps because we were fortunate to have something that could work as a temporary replacement for rules : clear objectives, strong leadership and the market as a quickly reacting judge. most countries wanted to meet the convergence criteria and thereby join the euro area. germany led the way, both in terms of its economic size and its example of fiscal discipline. now the objective of joining the euro has been achieved for many countries, and, in addition, germany has lost its leading role and the markets react less to fiscal laxity. instead of national leadership towards clear objectives we have 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 within the countries puts narrow national political interests first the agreed rules become moot – “ peer pressure ” becomes ” peer protection ”. incorrect facts have been more or less deliberately sent