increasingly important adjustment mechanism. in order for markets to be flexible and send the proper signals, policy - makers must ensure an institutional framework that sets the right incentives. substantial progress has been made but a lot still needs to be done. in particular, labour market reforms are still lagging in many countries. as a result, the ability of economies to adapt quickly and generate employment is still limited. the lisbon agenda, the “ pro - employment and growth blueprint ” for europe, sets the right priorities. however, it needs to be implemented more forcefully. this would go a long way towards creating the dynamic and flexible environment that europe needs, not only for the proper functioning of monetary union but also for the attainment of the growth and employment objectives of the lisbon agenda. the stability and growth pact sound fiscal policies are another prerequisite for monetary union to work. as sovereignty over fiscal policies remains at the national level, the eu member countries decided to introduce fiscal rules to help to prevent imprudent fiscal policies and their adverse effects on inflation and expectations. these rules are enshrined in the maastricht treaty and operationalised in the stability and growth pact. in setting deficit and debt targets ( most notably the 3 % deficit limit ) and establishing procedures for budgetary surveillance and control, they are not fundamentally different from appropriate rules at the national level. compliance with the rules in member states will keep deficits low enough to ensure government solvency while providing governments with the necessary room to smoothen economic fluctuations through the operation of automatic fiscal stabilisers. this will also generate an appropriate fiscal environment for monetary policy - making at the euro area level. the growth and stability pact is a fundamental pillar of european monetary union. past problems with its implementation cannot be denied, but the recent reform of the pact aims to remedy this. in order to foster fiscal discipline, the governments of the member states, together with the commission, now need to implement the revised rules in a rigorous and consistent manner. the current excessive deficit procedures, and above all the case of germany as not only the largest economy but also the “ source ” of the pact are the real test. in this way, confidence in the credibility of the rules and in prudent fiscal policies can be reinforced. this will not be an easy task, admittedly, and serious concerns have been expressed. sound fiscal policies will remain a priority for many years to come. the final stage what does all this imply for the future of europe? given

than in the past. this could be a concern in view of the generally limited price and wage flexibility, low labour mobility and the lack of a risk - sharing mechanism due to the still incipient financial integration. time will judge the severity of this potential effect. montary union with the completion of the single market and european monetary union the economic and the monetary side of the “ triangle ” have been completed. this raises the fundamental question : can monetary union work and survive without the third side of the triangle, which is without a fully - fledged political union? the answer is clear : yes, it can. it is possible that, over the very long term, strong elements of a political union may ( need to ) emerge, but for the time being economic and monetary union ( emu ) can proceed perfectly well without a political union in the form that we understand today. here are the main arguments : first, monetary union in itself has a clear political dimension. it entails the transfer of national monetary policy decision - making powers to a supranational entity, the european central bank. relinquishing national sovereignty in such an important field is a substantive contribution to political integration. a central bank is, after all, an element of statehood. the maastricht treaty has made the ecb independent of any political influence so that it is able to fulfil its clear mandate of preserving price stability. monetary policy - making is hence not only centralised but also depoliticised. this step was only possible because euro area members had achieved a high degree of convergence in monetary policy attitudes and preferences in the run - up to monetary union. moreover, the way participating countries see themselves and their role as nation states has changed profoundly. in this respect, the launch of the euro marks the most recent and far - reaching step. national sovereignty has not only been transferred in the area of monetary and exchange rate policies but also in other key policy areas, such as competition and trade. finally, a single market has been established. as a result, the euro area countries already share important elements of state formation which are also key to the functioning of monetary union. flexibility second, from a purely economic perspective, what else is needed to make the single monetary policy work? most importantly, flexible markets are needed to enhance the ability of individual countries to respond to specific circumstances and economic shocks. wages and prices in particular may need to adapt more quickly and strongly. the mobility of capital will become an