keep in mind that a monetary union with ill - converging member states would be incapable of absorbing economic shocks. ultimately the tensions attending a malfunctioning emu would jeopardise the achievements of the single market. in my view, potential derogation countries should not even wish to take part in an emu which allows insufficiently converged member states to join. that brings me to the position of member states with a derogation. at present many member states are making desperate attempts to meet the convergence criteria for introduction of the euro. nevertheless we must make allowance for the fact that a number of them will not be able to participate when emu takes off on 1st january 1999. we should not make too much of their predicament. after all, a member state with a derogation is not excommunicated, but will be allowed to join at a later date. if they succeed in meeting the convergence criteria within the near future, some of these countries will be able to join the core group when the euro banknotes and coins are introduced in 2002. moreover, an exchange rate mechanism is presently being designed which seeks to ensure that the derogation countries retain close links with the core group. the mechanism will support their exchange rate policies. it aims to prevent unduly large exchange rate movements within the european union which might impede the workings of the single market. at the same time, efforts will have to be made to reinforce convergence between the so - called ins and outs in stage three in order to promote the accession of the derogation countries. here the pact for stability and growth can make a major contribution. under the pact, the eu member states, whether in or outside the euro area, commit themselves to strive for a near - balanced budget or even a budget surplus. in fact, the pact would bring about a return to the budgetary discipline adhered to before the deficits of many countries began to get out of hand in the 1970s and 1980s. a strong monetary union creates the right climate for low inflation. low inflation, i. e. price stability, is the overriding objective of the ecb. internal stability, meaning stable prices, is the principal aim. external stability, though not a primary objective, may ensue. there is after all a clear connection between a strong emu with low inflation and the external value of the euro ; it is in fact a precondition for a strong and stable euro. when

minds. [ note 1 ] history has shown that this switch is typically sudden. but once this shift occurs, inflation would remain above the ecb ’ s inflation target for a prolonged period, even when there are no additional inflation shocks. taming inflation will then become increasingly more difficult and costly. in monitoring risks of second round effects, central banks pay close attention to wage developments and inflation expectations. subject to the caveat that information on wage formation is not as granular and timely in the euro area as it is for example in the united states, current wage developments do not reveal clear evidence of a wage - price spiral in the euro area. although nominal wage growth has been picking up, its pace is not sufficient to keep up with rising consumer prices. this said, persistently tight labour markets point to rising risks of a further acceleration of wage growth. figure 3 shows for the netherlands that nominal wage growth has indeed been picking up and the forward - looking wage indicator points to higher future wage growth. a new monthly wage growth tracker developed by my colleagues from the central bank of ireland based on job postings also reveals that growth in euro - area posted wages accelerated in 2022 and reached 5. 2 % year - on - year in october. besides, the wage tracker shows that like inflation, wage growth has also become increasingly broad - based. [ note 2 ] we will need to be on high alert for any feedback loop to prices. moreover, measures of inflation expectations for several types of agents point to mixed evidence on their anchoring to the ecb ’ s inflation target. for professional forecasters and market participants, mean or median expectations have increased since mid - 2021 to levels slightly above 2 %. and their sensitivity to short - term inflation expectations has remained stable in recent months. for households on the other hand, both median long - term inflation expectations and their sensitivity to short - term expectations have increased visibly. [ note 3 ] this suggests a weaker anchoring. when we look at the whole distribution of inflation expectations, however, we can detect signs of a weaker anchoring of expectations not only by households but also by market participants and professional forecasters. uncertainty and disagreement on future inflation have increased for all agents, and so has the probability they attach to high inflation over the long run ( figure 4 ). this is a risk we need to monitor. evidence from the great inflation in the 1970s demonstrates why. up to 1971, the mean of professional forecasters ’ inflation expectations in the united states