of labour, a fast process of technological change and the ageing of the european population. the appropriate response is to create the conditions which will allow both firms and workers to deal with these challenges in the most effective and efficient manner, thereby ensuring a high level of output growth and job creation in the longer run. the recent relaunch of the lisbon strategy at the spring european council meeting has rightly refocused policy priorities on the drivers of growth and employment. this needs a strong commitment to well - designed and comprehensive structural reforms, the benefits of which are efficiently explained to the public opinion. by undertaking the measures and convincing the public in this way europe will succeed in both improving the economic outlook and sustaining the welfare and prosperity of european citizens. the exchange rate mechanism ii a little more than a year has now elapsed since ten new member states joined the european union, and their economic integration has been progressing at an impressive pace for a number of years. a number of these countries have also advanced significantly in terms of monetary integration. with effect from 2 may 2005 cyprus, latvia and malta joined the exchange rate mechanism ii ( erm ii ), bringing the number of countries participating in erm ii to seven. indeed, estonia, lithuania and slovenia had already decided – in june of last year – to join denmark in erm ii. the inclusion of the new currencies in the mechanism has proceeded in a very smooth and orderly manner. with their entry into erm ii, these countries have linked their currencies to the euro as a preparatory step towards the ultimate adoption of the single currency. being members of erm ii will help them to orient their policies towards stability. indeed, as was stressed in the 1997 amsterdam resolution of the european council on erm ii, the mechanism has been designed as a reference for the conduct of sound economic policies in general and monetary policy in particular. thus, the mechanism should also contribute to the achievement of sustainable convergence. however, membership of erm ii will not automatically yield sound policies. rather, successful and smooth participation in the mechanism requires significant commitments of the part of its members. although the precise nature of these commitments depends on the specific situations in the various participating countries, i would like to stress in this context the importance of pursuing sound fiscal policies and a stability - oriented monetary policy, as well as measures to enhance the flexibility and adaptability of the economy. the pursuit of such policies within the erm ii framework will not only be of direct benefit

rules in question vary in their extent and reach, depending on whether one considers the national level, the euro area level or the global level. at the national level, for instance, the existence of a national currency guarantees that there is no exchange rate risk hampering capital flowing from one region to another ; tax rules are usually applied uniformly across a nation, which prevents arbitrage ; and the regimes for regulation, supervision and resolution are identical, at least for specific parts of the financial sector, such as banks, which strengthens depositors ’ confidence. at the global level, financial stability arrangements naturally differ across countries. there has been significant progress in aligning global frameworks for regulation, supervision and resolution, but more still needs to be achieved. there is no global jurisdiction for cross - border and crosscurrency transactions across countries and tax regimes differ widely from one country to another, offshore financial centers and non - cooperative jurisdictions being extreme cases. last but not least, underlying economic conditions and policies widely differ across countries, which affect incentives for cross - border capital flows and for financial integration to deepen or weaken. and at the euro area level, financial stability arrangements before the crisis were not in line with the requirements of monetary union. while member states shared a single currency, there was no single framework for supervision and resolution. there was also a general lack of awareness of the risks that such a fragmented institutional framework could pose for area - wide financial stability. this led to a general misperception of financial risk, and short - term, uni - directional financial flows. iii. strengthening the necessary institutions and policy rules is essential for the euro area to reap the full benefits of financial integration the financial crisis of 2007 – 2009 and the sovereign debt crisis of 2011 were wake - up calls for our continent. they exposed the incompleteness of our monetary union, the fragility of our financial integration, and the limited scope for action of institutions other than the ecb. in short, they strongly underscored the need to move to a genuine economic and monetary union. euro area leaders have since launched the banking union, to be complemented over time with the capital markets union, to deepen financial integration within the euro area. the banking union will help strengthen cross - border lending to households and companies within the euro area. the capital markets union aims to strengthen integration of capital markets within the area. this, in turn, will help strengthen cross - border holdings of productive and financial assets.