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

##ries. the strong competitiveness of the financial sector is furthermore supported by high business and regulatory standards as well as effective and stringent banking secrecy rules. however, the imf critically mentioned the low domestic profitability and efficiency of austrian banks. for one thing, these factors are traceable to strong competitive pressures given the high banking and branch office density. for another, banks still retain a rather unfavorable cost - income ratio, with some banks still absorbing the costs of recent domestic consolidation, of expansion into central and eastern europe as well as of major investments into upgrading information technology platforms and risk management systems. furthermore, the imf expressed concerns regarding the high level of foreign currency loans taken out especially for house mortgages. the oesterreichische nationalbank had already raised the same concerns earlier on. in the first quarter of 2005, foreign currency loans accounted for 19. 3 % of all loans issued to domestic nonbanks and for about 30 % of all loans to households. from the european perspective, loans granted by austrian banks accounted for approximately 3 % of all euro area loans to nonbanks while foreign currency loans accounted for 18 % of all euro area foreign currency loans granted to nonbanks at end - 20043. nearly 90 % of all foreign currency loans issued to nonbanks in austria are denominated in swiss francs while the importance of the japanese yen currently stagnates at a low level, equaling the volume of loans denominated in u. s. dollars. this high amount of foreign currency loans is tightly monitored by the austrian authorities and has already entailed a number of supervisory actions, including the introduction of a set of recommendations called “ minimum standards of granting and managing foreign currency loans. ” fsaps are designed to assess the stability of a financial system as well as to identify and remedy weaknesses in a country ’ s financial sector structure. swiss francs 42 %, japanese yen 19 %, u. s. dollars 2 %. 3. economic and financial sector performance in 2004 and in the first months of 2005 turning to my third issue, i would now like to give you a brief glance on the development of the austrian economy and financial sector in 2004 and the first months of 2005. austria encounters the current challenges and reform requirements with a forward - looking economic policy. the pension reform contributes to a sustainable retirement system that is financially secure in the long term. the corporate and income tax reform add to making austria an attractive business location and supports the