, in practice this means that the onus of adjustment falls on fiscal policy. fiscal consolidation thus remains a necessary precondition for the success of emu. indeed, whereas it could be argued that the stability and growth pact precludes fiscal policy from responding to short - term domestic needs, it is equally true that the constraints arising from that pact are meant to ensure that governments in the euro area have the necessary room for manoeuvre over the medium - term. the presumption here is that by achieving close to balance or surplus positions, governments would be in a better position to deal with normal cyclical fluctuations. in addition, the commitment to refrain from excessive deficits is also a necessary condition for the success of emu itself. this is the case because if such a deficit occurs in one of the larger euro area members, the inflationary pressures resulting from that deficit could instil an upward bias in ecb interest rates. for accession countries, contained public spending and flexible labour markets are also necessary from the point of view of achieving nominal and real economic convergence. excessive deficits would not only accentuate inflation differentials, undermining the ability of these countries to fulfil the maastricht criteria, but could also crowd out private sector investments, delaying progress in structural reforms and convergence in income levels. given that large deficits and labour market rigidities tend to weaken a country ’ s ability to achieve both nominal and real economic convergence, policies to address these issues are an integral part of the preparations which accession countries are making in advance of emu. the rationale behind erm ii erm ii is a fixed exchange rate regime, involving the adoption of a central exchange rate against the euro in agreement with the ecb. this rate is then allowed to fluctuate within specified margins, normally + / - 15 %, but narrower bands may be adopted subject to mutual agreement. the rationale behind erm ii is that, if a country succeeds in maintaining the value of its currency against the euro within the fluctuation bands for a period of two years, then it would be reasonable to assume that the country would be able to deal with the binding constraints of emu. during this phase, accession countries will have to prove that they are able to put up with the disciplines inherent in a fixed exchange rate without imbalances arising in other sectors of the economy. that is why accession to emu is conditional on prior participation in erm ii. furthermore

any such development. a second, not unrelated, theme is the so - called'global imbalances'issue. there is no time to rehearse all the arguments here, but one simple point can be made. as the size of capital flows from asia to the us increased over the past decade or so, the price – the interest rate – declined. hence, it would appear that developments on the supply side of this market were very important in driving the phenomenon. that is a reminder that if the capital is to flow more slowly to the us, adjustments to asian behaviour will be part of the process. the increased net supply of saving from asia reflected a sharp decline in corporate investment in the asian region ( outside of china ) after the crisis. at some point, asian corporate investment will presumably recover. one would also imagine that, in some cases, there is a need for upgrades to public infrastructure, and a case for higher - quality private housing. hence, in due course, the net supply of asian saving to international markets, other things equal, will decline. just when that will be, of course, and what other changes might accompany such developments, no - one can say. but no discussion of the challenges in the asia - pacific region would be complete without some coverage of such issues. let me conclude by saying how fitting it is that the conference takes place in sydney, one of the asiapacific's major financial centres. as the first largish market to open in the world trading day and as the financial centre of a medium - sized, developed economy, sydney plays a prominent role in the region's financial trading, even though some other markets are somewhat larger. it is the leading market for the world's sixth most actively traded currency. australia's share of global foreign currency trading, at about 3½ per cent, is higher than in a number of comparably sized economies, and is about three times australia's weight in world gdp. markets here are sophisticated and liquid, and the participants innovative. sydney, and australia more generally, has much to offer the region in financial services expertise. that said, participants here would be only too aware that financial market operations are highly competitive and the local players need to remain on their toes. so it is good to see some local market participants thinking about how to contribute to the development of vibrant markets in the region. these and other interesting issues will no doubt be covered in the conference, if they have not