of an unduly rigid interpretation of the provisions of the treaty. the application of the maastricht criteria in making this point i am clearly not suggesting, as some academics have done, that the maastricht criteria are “ neither necessary, nor sufficient ”. on the other hand, there are some aspects of the criteria that could legitimately be the subject of reflection. the calculation of the reference value of the inflation criterion is a case in point. over the past few years there has been a debate about how one should define “ best performance ” in relation to inflation and also about the term “ outlier ”. and even about why countries outside the euro area should be included among the best performing countries. this debate appears to have resurfaced again during the preparatory phase of the current ecb convergence report. another, and currently very topical aspect that also has ‘ level playing field ’ connotations is the impact of the ongoing spike in the international oil price. the current reference value for the hicp inflation criterion is influenced by countries whose energy needs are satisfied in varying degrees by non - oil fuels. at the same time, of the nms that would not have satisfied the inflation criterion on the basis of the march 2006 data, some are more heavily dependent on oil imports, so that price levels generally in these countries have been reflecting the higher cost of oil and energy to a much greater degree than is the case in the reference countries. this argument could also apply to malta in the future since not only is oil the sole source of electricity generation, but a high proportion of drinking water needs are also met by the transformation of sea water, a process that involves a high consumption of electricity. the difficulty of controlling inflation in current circumstances is indeed also reflected in the fact that three of the present euro area members exceed the inflation reference value by an average of 1 percentage point, and there is evidence pointing towards a divergence in inflation rates between these countries over the past five years. 9 moreover, the nms have registered rates of inflation between 2002 and 2005 that were around one half those recorded during the preceding four - year period. this is indicative of the significant degree of macroeconomic stabilisation taking place, at the same time that progress continued to be registered in terms of real convergence. in fact, since 2000 real gdp growth in nms was on average more than double that registered in the euro area member countries. these considerations acquire greater significance when viewed in the context of fiscal developments

issues of real exchange rate appreciation and the need to cope with large, and potentially volatile capital inflows. rising real exchange rates in nms in part reflect productivity growth in the traded sectors giving rise to balassa - samuelson effects, as well as a growing demand for non - traded goods and the effects of price deregulation. these factors would lead to relatively high inflation rates unless countered by nominal exchange rate appreciation, both of which could potentially hamper the process of nominal convergence necessary to adopt the euro. 5 the broad conclusion which emerges from a number of studies on this issue is that balassa - samuelson effects on the real exchange rate in nms are estimated to be of the order of 1 % to 2 % per year. 6 with regard to capital inflows, these are usually perceived as a source of economic growth, especially when they take the shape of foreign direct investment ( fdi ). however, they can also usher in risks of volatility and speculative pressures on the exchange rate. this is indeed a factor that is currently affecting some nms, as capital inflows appear to be shifting from fdi to portfolio flows of a more speculative nature, perhaps in part a by - product of the increased competition for productive investment from asian countries. in the near future, capital outflows from nms may also be occasioned by the creation of second pillar pension systems. needless to say, net capital inflows are accompanied by current account deficits, reflecting expansions in aggregate demand driven by investment expenditure or lower savings prompted by an expected growth in income. in the present scenario, pressures on the current account are being reinforced by the steady upward trend in international oil prices. markets often view wide current account deficits as a sign of vulnerability, thereby fuelling volatility in capital flows. so far, a number of nms with a flexible currency arrangement have managed such volatility through exchange rate flexibility, a tool which might, however, be progressively lost in the run - up to the adoption of the euro. developments in financial intermediation may also pose significant challenges in this regard. thus far there has been a tendency for credit to be relatively low compared to economic activity in nms, as banks, which are largely foreign - owned in a number of these countries, have been generally averse to advancing a significant amount of credit to enterprises, although tending to step up lending to households. 7 this implies the possibility that with a further international