mr garganas gives a speech on integrating greece into the euro area and the challenges ahead speech given by mr nicholas c garganas, deputy governor of the bank of greece, at the “ athens summit 1999 ” on 18 september 1999. * * * the adoption of the euro as a common currency by a first group of eleven european union member states on 1 january 1999 was rightly described as an historic event since the move to the final stage of economic and monetary union indeed marks a decisive step towards full economic and political integration between the countries participating in this endeavour. the vigorous and credible implementation by greece of policies aimed at achieving a high degree of sustainable economic convergence and meeting the terms of the maastricht treaty for emu participation have yielded concrete results, thus placing greece directly on the road to joining the euro area by the target date of 1 january 2001. over the past few years, convergence towards price stability has been impressive. the annual rate of inflation in august was 2 %. great progress has also been achieved regarding the general government budgetary position. in 1998, the deficit stood at 2. 5 % of gdp, and is expected to fall further ( to just over 1. 5 % ) this year, continuing the downward path of the debt – to – gdp ratio, which currently stands at 105 %. the gradual reduction in budget deficits, together with the entry of the drachma into the exchange rate mechanism, has led to an appreciation of the drachma ( first against the ecu and this year against the euro ), and lower long - term interest rates. in the first half of this month, the ten - year government bond spread versus germany was around 163 basis points, compared with 196 basis points in march 1999 and 425 basis points in september 1998. the remarkable nominal convergence achieved by greece indicates that its objective of meeting the maastricht criteria by early 2000 is now becoming a reality. although it is widely anticipated that greece will be admitted into the euro area by june next year so that it can adopt the single currency on 1 january 2001, we should not allow this achievement to dim our view of what remains to be done. as i see it, greece faces two broad sets of challenges. first, in the remainder of 1999 and in 2000, macroeconomic policy has to remain firmly focused on keeping the emu process on track and on securing the conditions that will make for a smooth transition and positive performance upon entry. from this point of view, the main

and within the next year the growth rate should gradually approach its potential, estimated at around 2? % per annum. the us, on the other hand, is growing fast, maybe too fast. certainly, i do not wish to belittle the achievements of the american economy, especially its high productivity growth, but the continuation of the twin deficits are certainly a cause for concern, in that a sudden correction could have far - reaching implications for the international financial system. the us sees with benign neglect its twin deficits. on the one hand, it expects that continuing fast rate of growth would generate sufficient tax revenues over the medium term, which, in combination with the gradual phasing out of some tax relief measures, will reduce the deficit and, on the other hand, they expect the current balanced of payments correction to be realized via a devaluation of the us dollar, which would help the sustainability of the us recovery and generate higher profits in dollar terms from the us investments abroad. in summary, they don't expect an abrupt and substantial rise in interest rates, which would have had adverse effects both on the fiscal deficit and on consumer demand, thus precipitating a cyclical downturn. however, the european point of view, if i am allowed to summarize, is that an unsustainably fast growth rate, based on private and public borrowing is not good for anyone and the us cannot be an exception. the eu, and especially the eurozone, has played a constructive role in promoting a stable financial environment. the recent appreciation of the euro is an indication of the markets'confidence in our economies. i believe that a strong euro is good for europe and the world, as it helps fight inflationary pressures and supports the confidence of consumers and producers. it is also clear that the eurozone cannot solve all the imbalances that threaten the stability of the international economy. i do not wish to enter the debate on whether the fiscal stimulus in the us was necessary two years ago, at the onset of the economic slowdown, but certainly it has to be reversed now as the us is growing at an unsustainable rate. at the same time, third countries, especially those in asia, should contribute themselves by allowing market forces to play a greater role in the determination of their exchange rate, and by abandoning their mercantilistic attitudes. however i should mention that, there is an open debate whether a revaluation of the chinese renminbi