council of laeken indicated in december that eight to ten countries will be joining the eu as from 2004. the chances of a big bang scenario, with all accession countries except bulgaria and rumania joining at the same time, has thus gained in probability. politically, this would be the preferred route, eliminating tensions between countries joining soon or at a later stage and facilitating the ratification process of individual accession treaties. on the other hand, a big bang scenario should not conceal the persisting – and sometimes substantial – structural differences between accession countries. there is a correlation between potential problems in the economic structure and the stage of transition reached. the consequent specific policy challenges will continue to demand attention even after accession, and notably when participation in the monetary union is considered. policy challenges for accession countries on the road to convergence let me begin by pointing out that over the past ten years the countries in central and eastern europe have engaged in a highly successful catching - up exercise. painful reforms were enacted, often attended by rampant unemployment. the necessary institutions, such as central banks, were built up from scratch. at the same time, the transition process from a centrally planned to a market economy usually proved more laborious than expected. the economic downturn was such that only a few countries have managed to regain the gdp level recorded before 1990. the growth potential may exceed the average in the european union, but so far the margin has been slim. for instance, the czech central bank puts the potential growth rate of the czech economy at 2 - 3 % per annum. income differentials vis - a - vis the european union will consequently persist for some time to come. in fact the policy challenges of the accession countries lie in furthering structural reforms aimed at raising the growth potential. economically, structural and real convergence towards the eu interact. it is a lengthy process, involving such measures as introducing free enterprise and corporate governance, as well as setting up social security systems and fighting abuse and corruption. in this context, the commission recently announced an action plan intended to boost the institutional capabilities of the accession countries. looking at my own field, i see that banking supervision will need to be stepped up. in general, the financial sector is not developing in line with the economy as a whole, and plays no more than a limited role in the financing of local enterprises. the capitalisation rate of banks and share / bond markets in poland and hungary is less than a third that in the eu. financial intermediation must clearly be stimulated if

we use the additional income, and how soon, and to questions of structural adjustment. one difficulty is that it matters a great deal whether the rise in the terms of trade is likely to be permanent or only temporary. unfortunately, we cannot really answer that question. it is obvious from my chart that past episodes tended not to be permanent, but they sometimes lasted several years and certainly long enough to be very disruptive. if the rise in income is only temporary, it would be desirable not to raise national consumption by very much. instead, it would make sense to allow the income gain to flow into a higher stock of saving, which would then be available to fund future consumption ( including through periods of temporarily weak terms of trade, which undoubtedly will occur in the future ). moreover, it would probably not make sense for there to be a big increase in investment in resource extraction if that investment could be profitable only at temporarily very high prices ( and which could come at the cost of reduced investment in other areas ). if the change is likely to be persistent, then income is likely to be seen as permanently higher. households and most likely governments will probably see their way clear to lift their consumption permanently, both of traded and non - traded goods and services. structural economic adjustment will also occur as the sectors whose output prices have risen, now being more profitable, will seek to expand, in the process attracting productive resources – labour and capital – away from other sectors whose output will decline as a share of gdp. australia ’ s floating exchange rate, which tends to rise in line with the increase in the terms of trade, helps the reallocation of labour and capital by giving price signals to the production sector. the higher exchange rate also speeds the spread of the income gains from the terms of trade rise to sectors other than the resources sector, by directly increasing their purchasing power over imports. the resulting rise in imports spills demand for tradable goods and services abroad, which helps to reduce domestic inflation. so the shift in the terms of trade will, unless clearly quite temporary, drive shifts in the structure of the economy. it is easy, of course, to speak in the abstract of “ reallocation of productive resources ”, but this means that some businesses and incomes become relatively smaller ; jobs growth in some areas slows even as in others it picks up. some regions struggle more than others. some sources of government revenue are adversely affected even as other sources see an improvement. this process will be