has limited the national sovereignty of fiscal policy. the treaty is primary international law and contains inter alia : • the commitment of member states to avoid excessive deficits • the 3 % threshold • an early warning procedure • the provision to give notice to a member state to take measures to reduce the deficit within a specified time limit • the right to impose fines if a member state fails to comply. the stability and growth pact fleshed out these provisions and streamlined the procedures at the same time. contrary to appearance, the stability and growth pact is not a non - committal statement of political purpose but secondary eu law. permanently fumbling with the pact is a clear sign that political authorities in many member countries were only vaguely aware of the implication of emu on fiscal policy leeway. the pact is a decisive element of the institutional framework of the monetary union. treaty and pact already resemble a partial political union. the technical preconditions for the functioning of emu are in place. if properly applied, this will suffice for the time being. in the medium to long term, however, additional political back - up will be indispensable. emu has tied the participating countries permanently together. national policy choices have become a matter of concern for all. for the lasting success of the politically decentralised monetary union 1. it is crucial to implement structural reforms, thus lifting member countries on to a higher growth path 2. it is crucial to overcome integration and adjustment fatigue 3. it is crucial to embrace reality and accept the fact that national sovereignty in fiscal policy is limited in a monetary union 4. it is crucial to accept the constituting principle of all democracies, the rule of law, which lays down the primacy of law over policy 5. it is crucial to adhere to the stability consensus of maastricht which is additionally put in question by disregarding the suggestions of the ecb and the central banks of the euro area to refine the convention ’ s proposal. it will be necessary to reconcile the “ ever closer union ” with the “ ever wider union ”. today we are further away from a political union than we were when the euro was introduced five years ago. regarding the co - ordination of budgetary policies, we are even thrown back to intergovernmental co - operation. it will be necessary to reconcile the negotiations on the constitution for europe with the damage done to the political stability consensus of maastricht. it is in the european and in

intra - euro - area trade. the euro was seen as the next logical step to complete the single market. emu was expected to serve as a catalyst for further economic reforms and political integration. who was right? after almost five years of emu one has to acknowledge that neither the positive nor the negative extremes have become true. however, the institutional framework currently faces a crucial stress test. the eurosystem ’ s monetary policy has managed to gain credibility and to build up confidence despite quite a number of challenges. this could not be taken for granted given the fact that there were no blueprints to fall back on. the centralised monetary policy and the decentralised but closely co - ordinated economic and budgetary policies constitute a rather demanding regime. the eurosystem at least has proved that it is up to the task. the ecb is endowed with an unambiguous mandate and has developed a strategy in accordance with the latest insights into monetary theory and practical experience. even the severe criticism of anglo - saxon economists and media has become less ardent recently. the monetary policy strategy is increasingly understood or at least better respected by market participants. long - term inflation expectations have been close to and mostly below the ecb definition of price stability of 2 %. the economic rationale behind the mandate and strategy is the generally accepted principle that price stability is the best contribution monetary policy can make to improving economic prospects and raising living standards. how this translates into a monetary policy strategy depends, of course, on the structural preconditions. it concerns the manner in which the complex transmission mechanism works its way through from monetary policy decisions to the economy in general and the price level in particular. a very important influencing factor in this respect is whether investment decisions are influenced more strongly by developments in long - term or in short - term interest rates. the two - pillar approach has proved to be the appropriate strategy for the euro area. it avoids creating unnecessary volatility in financial and real markets through its medium - term orientation, thus recognising that monetary policy does not have the instruments to fine - tune the economy. the prominent role of monetary growth acknowledges that money matters. this is by no means an outdated concept and is a lesson which i would like to stress considering the recent experiences of stock and housing market bubbles. and the track record? the ecb, together with the national central banks in the eurosystem, has delivered. it is fair to say that the credibility test has