jean - claude trichet : press briefing on the ecb convergence report opening remarks by mr jean - claude trichet, president of the european central bank, at the press briefing on the ecb convergence report, frankfurt, 20 october 2004. * * * ladies and gentlemen, welcome to this special press briefing on the publication of the ecb ’ s convergence report 2004. let me start by saying that only 15 years ago i could not have imagined that we would, in october 2004, be presenting to you a report examining the economic and legal convergence of sweden and ten countries from central and eastern europe and the mediterranean. at that time, most of these countries were still deprived of democracy and economic freedom. the prospect of joining the european union and eventually adopting a single european currency was out of sight for the most imaginative minds. but since 1 january 1999 the euro has been a reality, and since 1 may 2004 ten new countries are with us in the european union. the rules of eu membership say that at least once every two years, or at the request of a member state not participating in the euro area, a report needs to be prepared by the ecb and by the european commission. let me briefly recall the relevant treaty articles and the procedure laid down therein. according to article 122 of the treaty establishing the european community, the two institutions must report to the council on the progress made in the fulfilment by the member states of their obligations regarding the achievement of economic and monetary union, in accordance with the procedure laid down in article 121 ( 1 ). article 121 ( 1 ) stipulates that these reports must include an examination of the compatibility between each member state ’ s national legislation, including the statutes of its national central bank, and articles 108 and 109 of the treaty and the statute of the escb. the reports must also examine the achievement of a high degree of sustainable convergence. this is to be done by reference to the fulfilment by each member state of the criteria on prices, fiscal positions, exchange rates and long - term interest rates. thereafter, the treaty foresees that, after consulting the european parliament and after discussion in the council meeting in the composition of the heads of state or government, the council must, acting by a qualified majority on a proposal from the commission, decide which member states with a derogation fulfil the necessary conditions to adopt the euro on the basis of the criteria set out in article 121 ( 1 ). the publication of

##ness could be deprived of the benefits it should enjoy, in terms of increased market share, because of currency depreciation in competing countries. and if some countries were prepared to practice such “ beggar thy neighbour ” behaviour, why should others permanently open their borders to them? the point was not that the single market could not tolerate small exchange rate adjustments among a few of its members. it was that major currency volatility, of the type we had seen in the 1980s, would severely test the willingness of all to keep their markets open. and we can only imagine how, without the euro, currency markets would have reacted to shocks we have seen since its launch – the dotcom crash, the lehman bankruptcy, the sovereign debt crisis. the conditions for success in emu however, the case for the euro was always based on a trade - off. by reinforcing the single market in this way, it would lock - in the gains of economic integration and thereby benefit the whole union. but it would also deprive individual countries of adjustment tools for short - term shocks, notably their own exchange rate. thus for the trade - off to be beneficial, it was essential that those short - term costs were reduced as much as possible. this depended on certain conditions being fulfilled, which were established by mundell and later authors as part of the theory of optimum currency areas. they included : trade integration, to reduce the incidence of asymmetric shocks ; factor mobility and wage and price flexibility, to accelerate adjustment when shocks did hit ; and a system of risk - sharing, to reduce the costs of that adjustment process for individual members. but, in the euro area, it was clear that the importance attached to each of those conditions would not be the same. large - scale labour mobility was always unlikely, given cultural and linguistic barriers. it was also improbable that fiscal risk - sharing would reach u. s. levels, not least owing to the relatively larger role for national budgets as fiscal stabilisers. hence it was essential that euro area countries substituted for lower integration in these areas with stronger commitments in others. this meant four things in particular. the first was avoiding policy mistakes, such as boom - bust cycles emanating from weak prudential supervision. the second was building resilience to shocks through structural reforms and the continued deepening of the single market. the third was sound fiscal policies to provide sufficient fiscal buffers over the cycle. and the fourth was