few years. this progress has been achieved through the large - scale privatisation of state - owned banks and the extensive opening - up of the banking sector to foreign ownership. this process has contributed to greater financial integration with the eu and significant gains in terms of efficiency and stability. however, the level of financial intermediation remains relatively low and the provision of bank financing represents a much smaller share of gdp in the accession countries than in the euro area countries. furthermore, the financial sector of accession countries remains dominated by the banking industry, as capital markets are not yet fully developed. from an ecb perspective, further deepening of the accession countries'financial markets is needed to ensure the proper transmission of monetary policy impulses once they join the euro area, and it may also help these countries make full use of their growth potential. coping with any of the three challenges which i have just mentioned will have a significant impact on the design of monetary and exchange rate policies. taking into account the different starting points and progress made so far in addressing these challenges, accession countries may well pursue different approaches in the pre - accession phase. once in the eu, however, there is a clear path defined in the treaty that should be followed by all eu member states towards the adoption of the euro. first, immediately upon eu accession, the new member states have to treat their exchange rate policy as a matter of common interest. furthermore, in view of the final objective of adopting the euro, accession countries are expected to join erm ii at some point following accession to the eu. most accession countries have already expressed their intention to join the mechanism as soon as possible after their entry into the eu. however, it should be clear that erm ii membership does not need to happen immediately after eu accession in all cases, nor does erm ii membership need to be limited to only two years, which is the minimum for adoption of the euro. a longer membership of erm ii may, in some cases, be helpful since it would allow countries to retain the exchange rate as an instrumental policy variable during the catching - up process. participation in erm ii should thus be seen as a meaningful and flexible framework for increasing convergence with the euro area, and for tackling the challenges faced by accession countries on the road towards the adoption of the euro. finally, after having outlined the path along which the euro will go east, i would also like to say a few words about a path which i am confident will not be followed a

with available information for the fourth quarter. looking ahead to next year, the conditions remain in place for the euro area economy to grow solidly at rates around potential, with some volatility in the quarterly growth rates likely to emerge around the turn of the year on account of the impact of changes in indirect taxes in a large euro area country. overall, global growth has become geographically more balanced and remains robust, providing support for euro area exports. investment is expected to remain dynamic, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong earnings, and gains in business efficiency. consumption should also strengthen further over time as employment conditions continue to improve. this outlook for economic developments is reflected in the new eurosystem staff macroeconomic projections ( 2. 5 % to 2. 9 % in 2006, 1. 7 % to 2. 7 % in 2007, 1. 8 % to 2. 8 % in 2008 ) and is also in line with recent forecasts made by international organisations. the risks surrounding the outlook of sustained economic growth close to potential lie on the downside and relate mainly to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures, and concerns about possible disorderly developments owing to global imbalances. turning to the price developments, annual hicp inflation rose to 1. 9 % in november 2006, from 1. 6 % in october. the lower annual hicp inflation rates recorded in the previous months mainly reflected the significant declines in crude oil prices from august onwards, as well as base effects. while the outlook for energy prices remains uncertain, overall inflation rates are likely to increase again in early 2007 and then hover around 2 % in the course of that year and in 2008, also reflecting the impact of higher indirect taxes. the eurosystem staff projections point to a rate of inflation of 2. 1 % to 2. 3 % in 2006, 1. 5 % to 2. 5 % in 2007 and 1. 3 % to 2. 5 % in 2008. this outlook for price developments remains subject to upside risks, stemming in particular from a stronger than expected pass - through of previous oil price increases, as well as the possibility of renewed oil price increases and of additional increases in administered prices and indirect taxes beyond those announced and decided thus far. more fundamentally, given the favourable momentum of real gdp growth observed over the past few quarters and the positive signs from labour markets, wage developments could be stronger