distinct from particular national interests. in view of these auspicious underlying economic and institutional conditions, it appears completely misplaced to worry about the stability of the euro. and yet, it is a long - standing experience of the bundesbank that inflation has often been declared dead, but has never actually died. nothing is more dangerous than complacency and slackening vigilance. where might any future risks to the stability of the euro lie? well, in the first place, a number of unavoidable problems arise in connection with the transition to a larger common monetary area. it is doubtful, for instance, whether the demand for, and the velocity of circulation of, money in the new monetary area will be sufficiently stable from the outset. what will be the impact of, say, structural changes in the financial sector ( catchwords are : the trend towards securitisation and towards disintermediation )? what will be the implications for the monetary policy of the ecb of the differing monetary policy transmission channels within the eurozone? these transitional difficulties should not be made light of, by any means. even so, they will diminish in significance – albeit not in the short run – as increasing experience is gained within the eurosystem. it will certainly be interesting to see how the ecb responds the first time that it feels a “ head wind ”. it is a long - standing experience of the bundesbank that the acid test of monetary policy comes when a restrictive policy stance has to be pursued. in this context, the prevailing structure of the eurosystem naturally raises a variety of special questions : 1. will the ecb governing council act quickly and resolutely even if it were to be confronted with massive political opposition? 2. will the general public in europe support the ecb just as unreservedly as german citizens backed the bundesbank, i. e. will the ecb enjoy comparable backing for its stabilisation policy? 3. will the ecb governing council abide by its orientation towards the euro area even if that policy no longer seems appropriate for particular parts of that area? 4. how will the monetary policy of the ecb respond if the ecofin council exercises its powers under article 111 of the ec treaty, for instance by formulating general orientations or exchange - rate policy? will the stability reservation laid down in that clause actually hold up? in my opinion, the ecb deserves our full confidence

either. on the one hand, in view of the continued convergence and integration of the eurozone, optimism certainly seems warranted : that is suggested by the increasing cyclical synchrony, the progressive integration of the financial markets ( and especially of the european money market ), and the completion of the single european market. on the other hand, substantial regional differences and divergences cannot be ruled out ( just think, for instance, of the north / south divide in italy, and the east / west divide in germany due to reunification ). the range of possible causes could not be wider, for example • asymmetric external shocks, • divergent pay settlements, • differing national policy priorities, or • diverse national structural conditions. generally speaking, it is true to say that, the more flexible national goods, services and labour markets are, the lower will be the demand for compensatory measures on the part of national fiscal, economic and structural policies. but precisely market flexibility is a weak link in many european member states ( and that goes particularly for germany ). in many cases there is a considerable need for reform, e. g. with respect to reducing the government expenditure ratio, deregulation, restructuring of social security systems or adjusting tax legislation. there are, however, good grounds for hoping that the pressure exerted by the single currency will greatly foster the reform process. yet even if major steps are taken towards flexibility, the risk of national or regional special developments can never be ruled out altogether. whereas it used to be possible, at least to a certain degree, to respond to special national problems by modifying the interest rate and / or the exchange rate, this option is no longer available in the monetary union. the consequence is that the demands made on political compensatory measures, on the willingness and ability of national policymakers to respond, and on the european coordination process have definitely risen. national failure, especially on the part of a major country, may have a pronounced impact on the common interest - rate level and / or on the external value of the euro. finally, this state of affairs also gives rise to the question of the suitability of the underlying institutional conditions, i. e. of the ec treaty. considerable doubts exist as to whether, in the light of the demands described above on a policy compatible with the euro, the demarcation of responsibilities between the european level and the national level, the rules for coordinating community decisions and the structures of the european institutions