united states to ensure that our economies are sufficiently resilient to respond effectively to all the shocks and adjustments that the future will surely bring. caroline freund ( 2000 ), “ current account adjustment in industrialized countries, ” board of governors of the federal reserve system, international finance discussion paper no. 692, december. jean - claude trichet : euro in wider circles speech by mr jean - claude trichet, president of the european central bank, at the conference “ goodbye lisbon ” organised by the european banking congress, frankfurt, 19 november 2004. * * * ladies and gentlemen, it is a pleasure for me to share with you some thoughts on the euro in wider circles. reflecting on what the term “ wider circles ” means for the euro, i think of the eu member states that still use their national currencies and that aim to adopt the single currency in the future, and in particular the ten new member states that joined the eu earlier this year and their path towards the euro. let me briefly say a few words on this aspect. the euro goes east it is now 15 years ago that the berlin wall fell, giving rise to one of the most astonishing political and economic transformations in european history. who could have imagined 15 years ago that in may 2004, eight countries in central and eastern europe, together with two countries in the mediterranean, would be members of the european union? the perspective of joining the european union and eventually adopting a european single currency was out of sight for even the most imaginative minds. in only 15 years, these countries managed to restore and entrench democratic institutions and market economies, replacing the communist ones that were imposed there before. the accession of ten new countries to the eu was an important milestone in a process that will lead to the eventual adoption of the euro by these new member states. the euro will go east and south and the road to the adoption of the euro is embedded in a well - defined institutional framework. a crucial phase before euro adoption is erm ii membership for at least two years. although there are no formal criteria to be met for entry into erm ii, successful participation in the mechanism requires that major policy adjustments - for example relating to fiscal policy and price liberalisation - are undertaken before joining the mechanism. participation in erm ii is an important means to anchor exchange rate and inflation expectations and to promote consistently sound policies. it helps to orient macroeconomic policies to stability, while at the same time allowing for a degree of flexibility,

s. residents leads to adjustment. even considering heavy purchases by central banks of u. s. treasury and agency issues, we see only limited indications that the large u. s. current account deficit is meeting financing resistance. yet, net claims against residents of the united states cannot continue to increase forever in international portfolios at their recent pace. net debt service cost, though currently still modest, would eventually become burdensome. at some point, diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios. resistance to financing, however, is likely to emerge well before debt servicing becomes an issue, or before the economic return on assets invested in the united states or in dollars more generally starts to erode. even if returns hold steady, a continued buildup of dollar assets increases concentration risk. net cross - border claims against u. s. residents now amount to about one - fourth of annual u. s. gdp. a continued financing even of today ’ s current account deficits as a percentage of gdp doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk. this situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the u. s. current account deficit and rendering it increasingly less tenable. if a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less. * * * it seems persuasive that, given the size of the u. s. current account deficit, a diminished appetite for adding to dollar balances must occur at some point. but when, through what channels, and from what level of the dollar? regrettably, no answer to those questions is convincing. this is a reason that forecasting the exchange rate for the dollar and other major currencies is problematic. our analytic difficulty is that the forces driving the current account deficit are more, perhaps far more, visible than those determining the ex ante financing of the deficit. the former are captured by reasonably reliable estimates of income - and price - driven trade imbalances and net interest income ; the latter by the considerably more amorphous assessments of international portfolio choices. the inability to anticipate changes in supply and demand for a currency is at the root of the statistically robust finding that forecasting