than some financial market players had expected. at any rate, the media expressed surprise that no major mishaps were to be reported. a steep rise in equity and foreign - exchange - market prices seemed to bear that out. some people actually believed that the longer - term potential of the euro could be exploited in full in the first few days. a few apparently thought that • global investors would quickly switch a large proportion of their assets into euros, and that • central banks would rapidly diversify their reserves in favour of the euro. in the meantime, a rather more cautious assessment - at least, as compared with the initial euphoria - has won through in the markets, especially as regards the pace of any such assumption by the euro of the role of a major investment and reserve currency. exaggerated short - term expectations have thus inevitably been followed by a certain disillusionment, and even disappointment, which has ultimately been reflected in the external value. political developments in the balkans have likewise played ( and are still playing ) a role, at least in the short run. however, there is no reason at all to write off the enormous potential of the euro - which some people have seemingly been tending to do of late. the potential is there. yet the markets should not be too short - term in their orientation. the international attractiveness of the euro will hinge crucially on the extent to which it manages to gain investors ’ long - term confidence, and to which it succeeds in accumulating credibility of its own. of course, that will owe a great deal to the economic and political setting. that has likewise been the case in the past six months : • in the economic setting, it has transpired that - contrary to some fears expressed during the past year - the us economy continues to be marked by an exceptionally buoyant growth process. in a number of euro countries, by contrast, the impression of a certain short - lived slackening in growth has been confirmed. in the meantime, however, there are signs of activity starting to pick up again soon. and as far as the political setting is concerned, a number of euro countries are still rather far away from the medium - term objective of the stability and growth pact, namely a balanced budget, as is mentioned in the recent monthly bulletin of the european central bank. that forms a distinct contrast to the united states, which is in the enviable position of being able to think about what it can do with its budget surpluses

the workers could negotiate. there is simply no room for any wage mark - ups. frictions in the capital market are a less debated area. yet they play an important role not only in financing the investments of existing firms, but also in the reallocation of capital from less productive to more productive uses. this is a part of the “ creative destruction ” by which the economy adapts to changes in the environment and raises its total factor productivity. there has been a lot of debate and analysis of financial integration. we know the euro has catalysed substantial integration in markets closely linked to monetary policy. in particular, the interbank markets are well integrated – or at least they were, and hopefully will be again, once the turmoil passes – as are the government bond markets and, increasingly, also the corporate bond markets. however, much still remains to be done in other areas. the infrastructure supporting the bond and equity markets is fragmented and hinders competition. retail banking continues to be mainly national, except in our two countries and some others. we know from experience that protected sectors seldom develop, because they lack incentives. and so it is also in financial services : it is the pressure of cross - border competition that will motivate innovation and productivity improvement within the financial sector. the best way to guarantee a high level of financial services for eu citizens is to remove the remaining obstacles to competition. financial development goes hand in hand with financial integration. financial development is, in turn, an important determinant of competition, innovation and, thereby, productivity in the whole economy. without well - functioning financial markets, economic power would be in the hands of those who have liquid wealth, collateral and connections, not in the hands of those who have ideas. that would be a recipe for stagnation. financial markets create the opportunities for newcomers to dislodge the incumbent, to leapfrog them by innovating. competition increases, monopoly rents fall and productivity rises. the finnish perspective finland's road to emu finland was among the first group of countries that moved to the third stage of emu at the beginning of 1999. finland had been a member of the eu for three and a half years at that time. the currency had been part of erm2 for less than two years. at the time of finland's accession to the european union in 1995 it was not yet certain that emu would become a reality. the likelihood that finland would be in the first group of countries