, especially as regards the integration of equity markets, continued efforts to harmonise legal and regulatory frameworks, and the consolidation of the banking sector. not only would these reforms raise potential economic growth, but they would also make the economies more flexible and thereby strengthen the resilience against shocks. this in turn would facilitate the pursuit of stability oriented macroeconomic policies. let me now turn to a second major challenge i see, namely enlarging the euro area. the historic eu enlargement with ten countries on the 1st of may last year was only a first step in the process of economic and monetary integration of the new member states. none of the 10 new member states have a special status as regards the introduction of the euro, implying that they are all expected to strive to fulfil the convergence criteria and subsequently to adopt the euro. an important step in this process is to join the exchange rate mechanism erm ii, for which at least a two year membership is foreseen in order to comply with the exchange rate criterion. although there are no formal criteria to be met for entry into erm ii, successful participation will benefit from having major policy adjustments - for example relating to fiscal consolidation and price liberalisation undertaken before joining the mechanism. otherwise, significant pressures on the exchange rate may arise which may jeopardise the convergence process. having proceeded with the necessary structural adjustments, participation in erm ii can be an important means of anchoring exchange rate and inflation expectations and of promoting discipline. it can help orient macroeconomic policies to stability, while at the same time allowing for a degree of flexibility if needed, through the standard fluctuation band and the possibility of adjusting the central parity. this period can also be seen as a realistic experience of the capacity of member states to respect the requirements of the monetary union, in which the exchange rate will no longer be available in order to adjust to changing economic conditions. before adopting the euro, all convergence criteria, relating not only to exchange rate developments but also to inflation, public deficit and debt, and long - term interest rates, as well as legal convergence, will need to be achieved in a sustainable manner. only when all the criteria are met on a sustainable basis, will a country be eligible for adopting the euro. as it is an irreversible decision, joining the euro area is a very important step requiring careful preparation. every country will be assessed on its own merits and its own particular situation. whether this process will go swiftly

adjust to changing economic circumstances is increasingly important. many european countries have not been adapting their economic, social and legal frameworks - set up under very different conditions - rapidly enough to face these challenges. at the same time, the age structure of europe is getting increasingly unfavourable. in facing this challenge, the options are limited ; we need to adjust our regulatory frameworks in product, labour and financial markets in a way that competitiveness and economic dynamism are maintained. some countries in the euro area, which have done well in terms of maintaining high output and employment growth, demonstrate that such changes are possible not only outside europe but also within. at the eu level, the lisbon agenda constitute the main driver in this field. it aims at enhancing the knowledge - based economy and thereby productivity, increase labour participation and foster financial integration. recently, the report prepared by the high level group chaired by wim kok provided an assessment of the lisbon strategy and stated that there had been a “ disappointing delivery ” on the agreed measures. the report expressed an urgent need for renewed impetus, stronger commitment of national governments and a sharpening of the lisbon strategy ’ s focus on the acceleration of employment and productivity growth. it also regards the role of benchmarking as crucial. the ecb strongly welcomes these proposals, as they are well in line with our own views. indeed, what matters for our future success is innovation, productivity enhancement and employment growth and all measures should be directed to achieve these results. let me further elaborate on a few areas in urgent need of reform. most observers agree that further reforms in labour markets in many euro area countries are absolutely crucial in order to improve the quality, incentives and flexibility of labour supply. the current mix of tax and benefit systems continue to provide a disincentive to take up work or to work longer hours in many countries. measures to make wage growth reflect more strongly regional and sectoral productivity differences would certainly be helpful. in addition, efforts by governments to improve education and training systems to improve skills are to be supported. in product markets, substantial progress has been made during the 1990s with important effects on productivity, prices and employment. this is an encouragement to do more in terms of fully implementing the single market and reducing market entry barriers in national regulations which continue to hamper competition. especially in the services sector, where most new jobs are created, sometimes excessive regulation still persists. finally, i believe that further integration in euro area financial markets is possible