erkki liikanen : comment to prof gerard roland : after enlargement institutional achievements and prospects in the new member states comment by mr erkki liikanen, governor of the bank of finland, to prof gerard roland : after enlargement - institutional achievements and prospects in the new member states, at the central banking conference, frankfurt, 21 october 2004. * 1. * * introductory remarks professor roland ’ s paper raises some essential issues regarding institutional development of the new member states and prospects as to how enlarged european union will work. the paper looks at various institutional indicators compiled by erbd and the world bank. by the use of these indicators, the paper aims at answering the following specific questions i ) have new member states achieved their institutional transition in a stable and satisfactory way, ii ) has eu played a positive role in this process, iii ) is there anything that eu can learn for its needed structural reforms in labor markets, pension and welfare reform and iv ) how will eu work with 25 members. 2. summing up the main results of the paper the paper provides some tentative answers regarding the first two questions. it argues that institutional problems in the future are not going to be essentially worse than those facing existing eu - member countries. furthermore, the paper argues that eu has been playing “ fundamentally positive role in anchoring the institutions of the new member states to sound market system ”. as a general message, the paper suggests that fundamental market institutions and the basics of market institutions are well established and solid. the last two questions get understandably less attention in the paper, given the wide scope of the paper. first i want to comment two questions ; 1. hypothesis on external anchor and enforcement powers vis a vis the governments of member states 2. stable and satisfactory institutional transition 3. external anchor and enforcement powers regarding the first point, prof. roland argues that prospects on eu membership has enforced an institutional reform, but that once inside, incentives to fulfil future reforms will be weaker. the paper builds analogy to weak implementation of the stability and growth pact ( sgp ) and argues that eu does not have appropriate ( very strong ) enforcement powers. while to some extent it is rather easy to agree with this point, one may also recognize that sgp similarly to maastricht criteria - has improved fiscal prudence within the eu markedly over the last decade. and this in spite of all the difficulties. on the other hand the spg is still a relatively new instrument. the commission

the introduction of qqe, medium - to long - term inflation expectations of economists and the inflation swap rate ( implied five - year forward rate, five years ahead ) have risen moderately and remain around 1 percent today. nevertheless, the 2 percent target remains distant ( chart 3 ). from japan ’ s experience, it is essential first to make a continuous improvement in the output gap and thereby steadily raise the rate of change in the cpi. in this regard, the output gap it must be noted that the year - on - year rate of change in the cpi, as well as short - term inflation expectations, rose substantially, owing to consumption tax hikes in 1997 and 2014, and the surge in commodity prices in early 2008. bis central bankers ’ speeches estimated by the boj turned positively to 0. 1 percent in the january – march quarter of 2015. after a temporary deterioration projected for the april – june quarter, the output gap is expected to gradually improve in positive territory from the july – september quarter this year and increase its upward pressure on prices. the change in the core cpi ( all items less fresh food ) is currently about 0 percent. however, the cpi excluding food and energy is about 0. 6 percent, which exceeds the core cpi. the proportion of items whose prices have risen among all core cpi - composing items has increased to around 65 percent ( chart 5 ). moreover, some price hikes have accompanied increased sales. for those reasons, it is fair to say that there has been no deterioration in the underlying trend in prices. the boj projects that the rate of change in the core cpi will begin to rise from the second half of fiscal 2015. once the rising trend of the core cpi becomes stable, inflation expectations are projected to rise gradually toward around 2 percent. b. euro area ’ s inflation expectations : broadly consistent with the price stability target by contrast, in the euro area, the medium - to long - term inflation expectations of economists have been more or less stable at around 2 percent since the initial phase of adopting the euro ( chart 6 ). this is evident in two ways : one is that the rate of inflation had already moved to around 2 percent a few years prior to the euro adoption ; the other is that the ecb initially defined price stability as inflation rates below 2 percent over the medium term. medium - to long - term inflation expectations appear to have stabilized more firmly after the ecb further clarified its definition in 2003 as inflation rates below, but close to