nicholas c garganas : eu enlargement remarks by mr nicholas c garganas, governor of the bank of greece, at the panel discussion : “ the future of europe ”, at the cultural days of the ecb, frankfurt am main, 24 october 2007. * * * 1. i am delighted to be taking part in this discussion on the future of europe. my remarks will deal with the issue of enlargement. eu enlargement has been a long and involved process. the eu has expanded on five occasions, growing from six members to 27 members. beginning with the first enlargement in 1973, enlargement has been at the core of the eu ’ s development. it has provided both political and economic benefits. the first four enlargements involved only two or three countries on average and took place every 10 years or so. the fifth enlargement was much larger ; it comprised 12 countries and took place in two stages – in may 2004 and january of this year. although it was larger, it went smoothly and was a success. the 12 countries were integrated into the eu without any problems for the eu or for the countries themselves. it brought over 100 million new citizens, with rising incomes, into the eu. politically, enlargement has helped to overcome the division of europe and succeeded in establishing a regional system based on democracy, and a respect for human rights and the rule of law. it has helped the eu respond to major changes, including the fall of dictatorships and the collapse of communism, bringing stability and solidarity among its members. economically, enlargement has helped to increase prosperity and competitiveness, enabling the enlarged union to respond better to the challenges of globalization. in sum, enlargement has increased prosperity in the union and has strengthened the security of all eu citizens. in a continent the history of which had been marked by turbulence and conflicts, these political and economic benefits are not small achievements. 2. now let me say something about the present enlargement agenda. as you know it covers turkey, croatia, and the former yugoslav republic of macedonia, which are at different stages on the road towards eu membership. these countries have been given by the council the clear perspective of becoming eu members once they fulfill the necessary conditions. however, these countries each face some difficulties, especially since some enlargement fatigue appears to have set in. after growing from six members to 27 members, we should expect some slowdown in the pace and extent

constraints on mortgage credit availability to prospective borrowers with lower fico scores. second, one might expect that it will still take additional time for these headwinds to fully subside. this implies that the neutral short - term rate may be depressed for some time. third, my assessment is that the long - run equilibrium real federal funds rate is lower now than in the past, reflecting the likelihood that potential real gdp growth is lower due to slower growth of the labor force and more moderate productivity growth performance. another important factor that will affect the trajectory of short - term rates is how financial market conditions respond to a rise in short - term rates. monetary policy works on the economy through how it affects financial market conditions. economic conditions at any point in time warrant a particular set of financial market conditions so the fomc can best achieve its objectives of maximum employment and price stability. the fomc chooses a policy stance to help support financial market conditions that will lead to economic outcomes consistent with its objectives. an important aspect of current financial market conditions is the very low bond term premia around the globe. if a small rise in short - term rates were to lead to an abrupt increase in term premia and bond yields, resulting in a significant tightening in financial market conditions, then the federal reserve would likely move more slowly – all else equal. as an example, consider the experience of the 1994 – 95 tightening cycle. bond yields rose sharply and the federal reserve tightened less than what was ultimately priced in by market participants. conversely, if term premia and bond yields were to remain low and the economic outlook suggested that financial conditions needed to be tighter and a rise in short - term rates did not generate this outcome, then the fomc would likely need to raise short - term rates further than anticipated. the 2004 – 07 tightening cycle might be a good example of this. the fomc ultimately pushed the federal funds rate up to a peak of 5. 25 percent, in part, because the earlier rise in short - term rates was generally ineffective in tightening financial market conditions sufficiently over this period. 5 this means that there is uncertainty about the trajectory of short - term rates from two distinct sources : ( 1 ) the economic outlook and what setting of financial conditions this implies is appropriate, and ( 2 ) what setting of short rates is consistent with the financial market conditions that the fomc is seeking to generate. this also suggests that market participants should be cautious in interpreting the summary of economic projection “ dot