where the group of new eu member states stands at the moment. a key convergence criterion is a high degree of price stability. a low level of inflation is a precondition for the provision of a favorable growth environment. the group of new eu member states has shown an impressive record of disinflation with inflation in some cases dropping from more than 20 % in the mid - 1990s to levels consistent with price stability in recent months. while we certainly welcome this disinflation trend it should be born in mind that it is related to the current central policy focus on inflation reduction as well as to past appreciations of the currencies and that is hardly sustainable to the full extent for the near future. the continuing income convergence process as well as the deregulation of administered prices will put inflation back onto the list of national policy challenges. another criterion requires the sustainability of the government financial position as expressed by the deficit and debt ratios to gdp. only a stability - oriented fiscal policy allows the countries of a monetary union to fully profit from one of the major benefits of monetary integration : a low level of risk premia and therefore interest rates. fiscal discipline will be one of the major challenges for the coming years as many acceding countries recently experienced difficulties in sticking to previously announced deficit targets. let me at this stage emphasize the commitment of the eurosystem to the achievement of sound budgetary positions. recent developments in some euro area countries give reason for concern and underline the importance of using the expected upward phase of the cycle to eliminate imbalances over the coming years. all countries would benefit from the strengthening of the sustainability of their public finances. the exchange rate criterion requires formal participation in the exchange rate mechanism ( erm ) for at least two years with no devaluations and without severe tensions. erm ii is designed to provide for flexibility and adjustability as well as for enough stability to help anchor expectations. in this view, participation in erm ii should contribute to real and nominal convergence. to ensure a smooth participation in erm ii it is essential that major policy adjustments are undertaken prior to participation in the mechanism and that a credible fiscal consolidation path is being followed. exchange rate policies within erm ii have to be in line with the general policy framework : with monetary, fiscal and structural policies. overall i ’ d like to emphasize the importance of considering the time period between eu enlargement and the adoption of the euro in the new eu member states as an essential test period to

s second largest economy. ( iii ) the chinese growth model and the chinese way of doing things have won grudging admiration, even if not legitimacy. questions 10. at the same time, there are several questions concerning whether china can sustain its performance and come out on top. let me list a few important ones. ( i ) can the china growth engine maintain its momentum? is the so called “ chinese model ” of export thrust, domestic investment binge and suppressed domestic consumption sustainable, especially in a large, heterogeneous country with a population of over 1. 5. billion? in particular, ( a ) will the external environment sustain the export momentum? ( b ) can a country continue to invest 50 % of gdp year on year without hitting against immense overcapacity, diminishing returns and a staggering nonperforming loan problem? in short, will china not hit a brickwall? ( ii ) second, can china make the strategic adjustment, what they call “ rebalancing ”, from external to domestic demand, and from investment to consumption in an orderly, calibrated way? ( iii ) another set of questions relates to what happens after china exhausts the scope for “ catch up ” growth as it already seems to. will it not get locked into a middle income trap because of ageing population and rising real wages? will china be able to innovate new sources of growth to keep moving up the value chain to escape the middle income trap? ( iv ) fourth, a political economy question is whether china can rise to dominance even as it continues under an authoritarian regime? the chinese success so far has, of course, given near legitimacy to china ’ s authoritarian model. will continued authoritarianism be a plus point for china ’ s inexorable rise to the top or will it be a drag? will the regime implode under its own weight? or as some analysts argue, will bis central bankers ’ speeches china ’ s growing prosperity itself open up an avenue for winding down the authoritarianism, and provide a roadmap towards democracy? ( v ) finally, a question more relevant here in the reserve bank is what of the renminbi, in particular its potential international status? quite independent of any currency in view, we in india have held that for any currency to be a global reserve currency, it has to fulfill certain attributes : ( a ) the currency must be freely convertible both on current and capital accounts ; ( b