. yet critics raise a number of objections to these arguments. first, they claim that the risks to price stability in the current environment are not acute, that inflation rates are low and inflation expectations are still firmly anchored. second, they warn that rapid consolidation in these countries would set off a cyclical downward spiral – they would “ save themselves to death ”, as it were. bearing this in mind, i would therefore like to focus on three topics in a little more detail : first, the importance of sound public finances for price stability ; second, the preconditions for sound public finances in the monetary union ; and third, the cyclical effects of fiscal consolidation. to begin with, let us consider why monetary policy can only be successful in the long run if public finances are sound. bis central bankers ’ speeches 2. the importance of sound public finances for monetary policy high levels of government debt make it difficult to safeguard price stability in more ways than one. as i have already indicated, an excessive debt level can cause growth impetus to slacken over the long run as the increased public borrowing requirement pushes up interest rates, making investment more expensive and thus diminishing growth. if the central bank does not identify this slowdown in growth in good time, its monetary policy stance will be too expansionary and thus ultimately raise the spectre of inflation. but even if the central bank does correctly identify the deceleration of growth, it might come under mounting pressure to adopt an excessively expansionary monetary stance in order to stimulate the economy and thus maintain the usual rates of expansion. the longer the central bank tries to use monetary policy means to mask the structural slowdown in growth, the less credible it becomes in terms of its price stability objective. this can send inflation expectations higher and ultimately fuel inflation. however, a structural slowdown in the growth outlook is not the only problem that excessive public debt holds in store for monetary policy. if a government has already racked up high levels of debt in economically good times, fiscal policy can no longer fulfil its role as a buffer when a crisis occurs. under normal circumstances, fiscal policy measures can stabilise aggregate demand during a cyclical downturn, for example via unemployment benefits or an automatically falling tax burden. this path is not available if such fiscal policy measures call the sovereign ’ s solvency into question. this applies not only to the traditional countercyclical fiscal stimulus measures i have just mentioned, but also to cases where the crisis has

banks would immediately begin to denominate their money and foreign exchange market interventions, on behalf of the ecb, in the new currency. their national currencies would nevertheless continue to exist for a period of some three years, as broken - amount denominations of the euro, and it will still then be possible, through the payments mechanism, to convert those national currencies into euro and vice versa, effectively automatically, for anyone that wished to do so. the likelihood is that wholesale financial market transactions generally within the euro - area will rapidly switch to the euro - denomination, although that would be up to the operators in those markets. the principle that will apply is one of no compulsion but equally no prohibition. it means that, here in hong kong, you should expect to be able to have accounts denominated in euro across which to conduct wholesale, particularly, financial market activity, if you wished to do so, although you would equally be able to continue for the time being to operate across accounts denominated in the national currencies participating in the euro if you preferred. euro bank notes and coin will not become available until some time probably towards the end of 2001 and it is unlikely that retail transactions denominated in euro will develop much before then. there will then be a maximum six - month period before the national currencies cease to be legal tender, at which point the transition to the euro will have been completed. again, during this period in relation to the transition of retail transactions the guiding principle will be no compulsion and no prohibition, although collective efforts will no doubt be made by retailers and banks to shorten the period of dual denomination as far as they can. as far as the uk is concerned, the new government - - while not definitively ruling it out - - has pointed to formidable difficulties in the way of participating in the euro from the beginning, and promised a referendum before the uk could join. a key consideration for us is likely to be whether - - on the basis of our assessment of the extent to which convergence has indeed been achieved - - the euro - area is a safe club to join in its early stages. if the government were to decide not to join, at least at that point, it will be crucially important - - in our own national economic interest, and in order to avoid creating unnecessary problems for the euro - member countries - - that we continue to pursue, in parallel with those countries, the consensus policies of monetary and fiscal discipline.