significant structural differences from the current eu member states. one of these differences is that the accession candidates are in a process of catching - up economically. they generally have inflation rates which are higher than those in the more mature and more slowly growing eu member states. this is an outcome, first, of differences in productivity gains across countries and sectors - known as the balassa - samuelson effect - and, second, of shifts in demand. the resulting real appreciation does not pose an obstacle to eu enlargement in terms of progress in the liberalisation of foreign trade and its ensuing welfare gains for the eu as a whole. nevertheless, if the eu accession candidates participate in monetary union before the existing structural disparities are eliminated, the single monetary policy in the euro area will not meet the needs of all the member states. a hasty enlargement of emu would therefore harbour stability risks for the euro area and might generate tensions among the participating countries. accession to the eu, however, does not imply immediate full membership of emu. instead, the eu accession countries will participate initially as “ member states with a derogation ” in the third stage of economic and monetary union. the precondition for full emu membership is that the accession countries achieve a high degree of sustainable economic convergence. the convergence criteria laid down in the maastricht treaty are the yardstick for this. these criteria set unambiguously verifiable requirements in terms of price stability, long - term interest rate levels, the government fiscal position, and participation in the exchange - rate mechanism of the european monetary system, erm ii. in addition, pursuant to article 121 of the eu treaty, the examination of the sustainability of achieved convergence “ should also take account of... the results of the integration of markets, the situation and development of the balances of payment on current account and... the development of unit labour costs and other price indices ”. the convergence criteria are designed to guard against inflationary tendencies within the monetary union and to prevent tensions arising from structural divergences in inflation. the task of stabilisation does make stringent demands on the monetary policy of the accession countries, but price stability may be regarded as a sine qua non of sustainable growth. for that reason, the accession countries not least in their own interests - should not enter emu until the process of catching up economically has already made significant headway and the adjustment function of the exchange rate can be more

would welcome my observations on these developments. let me make these observations by answering the following questions. first, why should we be concerned about these developments? second, how concerned should we be? and third, what should be done about it? why should we be concerned? let me start with why we should be concerned. this is, in my view, a question that we should take care to answer, and to answer properly. we should not assume that everyone knows the reasons for our concern. it should be clear that the governing council does not simply support the rules and procedures of the stability and growth pact for the sake of the rules and procedures themselves. if we defend the pact, it is because we believe that it makes good economic sense. it can contribute to the attainment of our societies ’ fundamental economic objectives. by respecting the rules of the pact, a member state pursues a sound fiscal policy. and this is in its own interest. a government that maintains a budgetary position that is close to balance or in surplus over the medium term and reduces its debt to a low and sustainable level has room to pursue its desired tax and spending policies. it also creates scope and increases flexibility to cushion the effects of the economic cycle. by contrast, a government that pursues an inappropriate fiscal policy, resulting in persistent deficits and higher levels of debt, increasingly limits its room for policy action. money spent paying interest on higher levels of debt cannot be used to provide public services or to lower taxes. and experience has shown that while such a trend of high deficits, higher debt and higher interest payments, and thus still higher deficits and so on, can easily be established, it is much harder to reverse. there is no fundamental choice between stability and growth. sometimes there seems to be such a choice. but it is either temporary or illusory. in the longer term and in reality, stability is a precondition for growth. they are two sides of the same coin. and sound public finances create conditions which are conducive to stability and sustainable growth. nowhere is there a better example of this than here in ireland. in the late 1970s and early 1980s, ireland ’ s debt increased dramatically and economic growth slowed. then, in the mid - 1980s, ireland changed course. it began to put its fiscal house in order. we all know what has happened since then. over the last 15 years, ireland ’ s debt ratio has been reduced from over 100 % to around 30