once inside the euro area. however, the most acute risk with erm ii is probably when the exchange rate is in the lower part of the band. virtually all the currency crises that we have experienced in recent decades have been due to speculation against weak currencies. erm ii, of course, is different from these previous failed regimes of pegged exchange rates in the sense that it has a clear exit strategy with regard to euro adoption. but this does not mean that erm ii is immune to large fluctuations in short - term financial flows. i do not think this should be a big problem for the currency board regimes or the so - called hard pegs in the new baltic member states. in their case, erm ii membership would merely be confirmation of a credible regime that has been successfully maintained for nearly a decade, even when confronted with severe shocks such as the russian crisis. this has been possible thanks to a high degree of wage flexibility as well as serious efforts to achieve fiscal consolidation. there is more reason for concern over some of the presently floating regimes as they move towards erm ii. substantial fiscal slippages have occurred in some of these countries, bringing them far from the 3 per cent deficit requirement. in most cases the deterioration has not been a consequence of additional costs related to accession ; neither has it mainly been the result of automatic stabilisers these are considerably smaller in acceding countries than in present eu members. instead, the large cyclically adjusted - deficits reflect increases in public wages and so - called mandatory social spending, combined with a lack of expenditure cuts in other fields. consolidation is planned to take place mainly in the medium to long term, and deficits are only set to be reduced to levels compatible with the convergence criteria towards the end of the decade ( fig. 1 ). some of my central bank colleagues from the new member states argue that rapid entry into erm ii and the target of an early euro adoption is precisely what will force politicians in their respective countries to improve fiscal policy. in the words of one of my most eminent colleagues : “ delay in entry equals delay in reforms ”. of course, i can understand this argument, and in the end it hinges on the political economy of each country. but using erm ii as a straightjacket is a risky strategy. it is all too reminiscent of the period 1990 - 92 in sweden when the “ nominal anchor ” of the ecu peg was supposed to “ bind us to the mast ” but

to restore credibility. among other things, restoring confidence involves being transparent about the problems and about the measures for dealing with them. it also means that measures are implemented as stated by the responsible authorities, without any deviations in timing or application. just the suspicion that specific industries or other interest groups may be receiving unjustifiably favourable treatment would quickly erode any confidence. 2. transparency is important. a severe crisis wipes confidence out - rightly so. we realised that it was up to sweden to regain it. to do so, all the cards had to be on the table. the extent of the losses and the magnitude of the bad loans had to be revealed in their entirety and valuation had to be prudent. if you hide losses initially or are overly optimistic in valuations, you risk having to apply again to the international investment community or to taxpayers for additional support. this, in my view, might jeopardise confidence and legitimacy. it is also necessary to have highly transparent and fair “ rules of the game ” for government support to the financial sector, not least to avoid political bickering. the responsibility for transparency falls primarily on two parties : the authorities and the banks. the authorities must be transparent about the broad framework for the solution of the crisis and the banks must be transparent about their losses and other deficiencies, financial position and need for external support. 3. someone must take the losses. it is important to realise that once the crisis has occurred, the losses cannot be hidden and must be dealt with in one way or another. in this respect swedish institutions worked well. party politics were clearly separated from business realities. and the politicians did a good job, realising that bygones were bygones, setting up a fair framework to sort the crisis out. from a political perspective it was important that the banks ’ owners were not rescued. people at large had to take substantial cuts in living standards - at least temporarily. letting the “ big guys ” go unhurt under these circumstances would have jeopardised the whole operation. 4. the macroeconomic policy mix for crisis management can differ. in our case, there was obviously not much room for fiscal stimulation of the economy. considering the much lower public debt, there could be more room in some asian countries but the potential budget effects of the financial losses also need to be taken into account. monetary policy has a difficult dual role : it has to strike a balance between stimulating the economy so as to