. the question is, can we afford to enter the eurozone if this reform is not yet completed? this brings us to the territory of political economy, more precisely to the issue of whether the euro fosters or hinders structural reform. although this issue has received a lot of attention recently in both theoretical and empirical work, my impression is that so far no consensus has emerged. what this means for the euro strategy of hungary is that probably we should not risk entering the eurozone until this crucial structural reform – that is, the scaling back of overly generous the welfare state in order to increase the labour supply, foster potential growth and stabilize public finances – is completed or is at least safely on track. the second risk, which frequently took the centre stage in debates on euro accession, is that of large and potentially disruptive capital inflows. the starting point of the argument here is that the catching - up process of new member states is about to continue for a long period even after they introduce the common currency. the catching - up entails a real appreciation, which, once the exchange rate is irrevocably fixed, translates into higher inflation and lower real interest rates. low real interest rates may in turn trigger excessive demand fuelled by an unsustainable credit boom financed from foreign borrowing. when the inevitable correction comes, there is no independent monetary policy to smooth the adjustment and a serious bust follows the boom. such boom - bust patterns were clearly observable in some first - wave eurozone members like portugal, ireland and spain. better wait with euro adoption, the argument goes, until catching - up is more progressed and the equilibrium real appreciation is smaller. i have one observation to this argument. we cannot ignore the fact that the financial integration of the new member states to a large extent had already taken place. the banking sectors in these countries are owned predominantly by euro area banks. in the past couple of years of abundant global liquidity, cross - border lending by parent banks in foreign currency was available in virtually unlimited quantities. this practically meant that foreign ( euro or swiss franc ) interest rates had become the point of reference for domestic consumption and investment decisions well before the euro was introduced, pushing down the effective real interest rate. it is obvious by now that the credit boom that was envisaged to take place after eurozone entry actually arrived much earlier. the only difference was that, not having the common currency yet, it left us with a sizeable currency mismat

reform carries the risk of a prospective underperformance in the eurozone. all in all, this crisis has evidently demonstrated that the banking sectors of the euro area and the new member states are deeply integrated, has greatly reduced the chances of credit booms in the forthcoming years and may exert an extra disciplining power in countries prone to fiscal misbehaviour in the future. for these reasons, i think it may act as a catalyst for the euro accession process. importantly, it should be let to act as a catalyst, that is, it should not be used as an excuse to make the entry criteria, or their interpretation, more stringent. finally, let me turn to the prospects of meeting the criteria in hungary and, more specifically, what i think this implies for our euro strategy. currently, there is no official target date for euro adoption in hungary. popular support for the euro is relatively strong, and it probably intensified further after the recent currency turmoil. all the major political parties agree on the desirability of introducing the common currency. however, at the current juncture, hungary does not meet any of the maastricht criteria. government and central bank officials, including myself, repeatedly expressed that the earliest date to start talking about a roadmap to eurozone may be somewhere in 2009. given hungary's not too convincing track record regarding the fiscal balance and inflation, an erm ii entry is only reasonable when the prospective meeting of the maastricht criteria is safely on track. hungary's convergence programme envisages meeting the fiscal deficit criterion by 2009, but chances are that this could take place as early as this year ( albeit only by a narrow margin ). as a reaction to the recent bout of the global financial crisis and the deteriorating prospects for external financing, the government decided to withdraw the draft 2009 budget and rewrite it so that the deficit reduction next year is more pronounced. in addition, the imf rescue package came with conditions which implied further expenditure - cutting measures. the central bank ’ s latest inflation forecasts imply that the maastricht inflation criterion may be met by 2010. these developments mean that the chances of meeting the entry criteria relatively quickly has improved somewhat, which implies that, in principle, we should not wait with erm ii entry too long. on the other hand, the financial turmoil has undoubtedly reached eastern europe. as a result, currently there is extreme uncertainty in the new member states regarding the future course