was clear to those who are familiar with european processes that there is no automatic spin - off from one integration move to the next. political ambition and political leadership are needed but are sadly lacking – with the result that national interests have moved back to the fore. much the same can be said of economic policy coordination in the eu and the stability and growth pact. it is disappointing to find that national interests are causing economic policy coordination to work less well than it might. peer pressure – which made itself felt up to 2000, even when implementing the stability and growth pact – has become significantly weaker. the instruments and procedures of economic policy coordination have become a more bureaucratic exercise. the responsibility that policy has of ensuring the “ smooth functioning ” of emu is hardly being exercised. the solidarity and discipline needed with regard to the single currency is lacking. there is little respect for the fact that, in a monetary union, parliamentary sovereignty and national governmental powers are de facto limited. in a monetary union, common rules must be applied and observed. the budgetary policy rules of the stability and growth pact are a great achievement for europe. they must be observed. unfortunately, in 1996 - 97 germany proved unable to enforce the requirement of no political influence being exerted in the procedures of the stability and growth pact. the rules would have cut more weight in better economic times and today ’ s dilemma would probably have been avoided. the euro has not yet acted as a catalyst for structural reforms either. the expectation that enhanced transparency and competition would make adjustments inevitable has been frustrated by an unexpected development : monetary union seems to shield the member states against having to undertake structural reform. there are no longer any nominal exchange rate changes which make adjustments necessary. however, what is happening is that the adjustments are merely being postponed for a time. although economic and monetary union did away with nominal exchange rates, real exchange rate adjustments are still being made, this being related to the different rates of inflation within the euro area. inflation differences in some cases have increased since the start of emu. that was not expected to happen. however, inflation rates and differentials in europe are generally much lower than in the first half of the 1990s. in most countries higher inflation rates have gone hand in hand with stronger growth. the low inflation rate in germany mirrors its poor economic performance. diverging inflation rates in a monetary union mean different real interest rates. however, in a monetary union, monetary policy can only be geared to the situation in the euro area as a

whole and not to individual regions or economic sectors. when it joins emu, a country has to be aware of this fact and to accept this rule. however, the degree of dispersion in inflation is not alarming and it is not notably higher or different from that seen in a long - established monetary union, such as the usa. this brings me to another issue currently under discussion in europe : deflation. the inflation rate in germany is currently the lowest in the euro area. with the german economy in stagnation for the third consecutive year, the imf staff recently published a paper which rang alarm bells as it stated that many indicators point to deflationary forces being at work in germany. however, the imf talks about “ mild deflation ”, not comparable with the deflationary downward spiral in japan. the debate suffers from confusion about the meaning of the term “ deflation ”. i think this word has to be used with extreme caution. properly defined, deflation describes prolonged periods of a declining price level in conjunction with an economic slump. what we have seen so far in germany is an ongoing process of disinflation. however, the risk of “ mild ” deflation occurring in germany cannot be completely ruled out and that risk is at least higher than in other euro - area economies. however, a few relevant points need to be made. • the expected decline in cpi inflation is being driven mainly by energy prices and the appreciation of the euro. • there is no indication of any restraint on private consumption induced by negative price expectations. price expectations are positive. the decline in consumption expenditure is caused by negative prospects of lower disposable income – higher taxes and increasing costs of the social security system are expected – and employment risks. • according to our empirical studies, the current weak credit growth in germany is not due to a general credit crunch but mainly to low demand for credit. • furthermore, the liquidity situation in germany as well as in the euro area as a whole is favourable. however, concerns remain about the prospects of continued stagnation at stable prices. to bring what i have to say this evening to a close, i should like to make a couple of remarks about the issues lying ahead of us in emu. as i said earlier : with the maastricht treaty european leaders have demonstrated their ability to take decisive action. it's time for europe to deepen the integration process further. 1. we need to overcome the