stage for big speculative attacks, which because of the usual overreaction of markets could trigger capital flight. indeed, there are numerous examples, starting with argentina and going backwards, that capital flight on the one hand, deprives the domestic economy of much needed investable funds and, on the other hand, drives the exchange rate to abnormally low levels, which immediately set the stage for a wave of price rises and drive the economy into recession. if this situation is allowed to develop the original anti - inflationary exchange rate policy would ultimately cause much more damage than if a pure free floating policy was followed. anti - inflationary exchange rate policies, which aim to eliminate imbalances and disequilibria, so as to improve domestic economic performance, inevitably entail a cost. there is no free lunch in a global and competitive world, especially when market makers are, sometimes, enticed by speculators and wild rumors. indeed, for almost 4 years the cost, borne by the bank of greece, of sterilizing the excessive short - term capital inflows attracted by the high interest rate policy, in combination with the exchange rate policy amounted to almost ½ % of gdp per annum. furthermore, the government proceeded with fiscal consolidation and structural reforms as well as other measures which were introduced ( notably extensive privatization ) as a necessary complement to the anti - inflationary exchange rate policy. these policies underpinned the improvement in the functioning of the economy and gave a significant boost to business confidence. the determination with which the three cs were pursued - consistent policies, continuity in policies and confidence building, after two to three years of hesitation, swayed the labor unions, businessman and the public at large to back the stabilization policies with the aim of entering the euroarea as soon as possible. in addition to targeting the exchange rate, the bank of greece always kept a close watch on the growth of m3 and domestic credit expansion and through open market operations absorbed any excess liquidity, which, if it had been allowed to reach the real economy, could have aggravated inflationary pressures. moreover, when necessary, we also imposed stricter terms on banks ’ obligatory reserve requirement deposited at the bank of greece, which were already relatively tight ( an amount equal to 12 % of deposits with the banking system and it can be noted that they were remunerated at a negative real interest ). however, at the bank of greece we knew that this was not sufficient to ensure a smooth run up before entering

##h any temporary sacrifice the economy incurred in order to fulfill our stabilization goals. the road to the euro was not strewn with roses, it was not smooth and i don ’ t want to underestimate the difficulties. with regard to the sequence of policies and priorities, we took a calculated risk starting our stabilization policies by adopting a policy that allowed for a moderately appreciating real exchange rate. we walked on a tightrope, sometimes for months in a row, as there were occasional bouts of jitters based on market expectations, even until the last moment, that our euroarea entry would be deferred or that we would join at a significantly depreciated rate. accordingly, whereas our goals were ambitious, our policies erred on the side of caution. we made gradual adjustments and, as an insurance, always had at hand a sufficient large cushion of foreign exchange reserves and a relatively high interest rate differential vis - a - vis euro rates, even until the last few weeks before entry into the euroarea.