how ”. what will the impact be of the european union almost doubling in size? it is reasonable to expect that the forthcoming enlargement will increase diversity and complexity within the union to an unprecedented extent. in economic terms, the proper fulfilment of the so - called “ copenhagen criteria ”, which require the accession countries to be functioning market economies and able to adopt the existing community rules, should help to avoid severe imbalances within an enlarged union. in this context, it should also be borne in mind that the combined gross domestic product ( gdp ) of all accession countries - measured in today ’ s figures - accounts for only 5 % of the european union ’ s gdp. in addition, the inherent dynamics of the single market and the “ convergence pressure ” exercised by policymakers and financial markets alike are also set to aid a rapid catching - up of the future new member states. the evidence of real convergence provided by ireland, spain or portugal after their accession to the european community gives grounds for confidence in this respect. in political and institutional terms, however, the eu will indeed be facing great challenges. the sheer increase in numbers will make decision - making more difficult and the legitimate interests of the “ newcomers ” may diverge significantly from those of the existing members, given the different stages of their economic transition and development and their specific historical experiences which undoubtedly shape their views on europe. the member states appear to be committed to addressing these challenges in the context of the ongoing intergovernmental conference on institutional reforms. let us hope that the igc can agree on at least those reforms which are absolutely essential to allow the union to function even after enlargement. even so, it appears almost certain that the forthcoming nice treaty will only be a milestone. it will by no means be the end point of the ongoing fundamental institutional debate on the future shape of europe. in this wider debate, many observers have argued that the original objective of an “ ever closer union ” might be somewhat incompatible with the current movement towards an “ ever wider union ”. combining the deepening and widening of the european union in addressing this altogether intelligible concern that the greater size and heterogeneity of an enlarged european union might lead to a standstill in integration or even an unravelling of the degree of deepening achieved so far, i would suggest starting with a certain amount of “ introspection ” aimed at assessing the depth of integration in the eu today. i believe there can be little doubt

capacity, if demand is successfully stimulated, firms will be able to produce more without incentives to raise prices. during boom times, when firms operate closer to full capacity, additional demand translates into stronger price increases. thus, the slope of the phillips curve is an increasing function of excess demand. ball, mankiw and romer ( 1988 ) and ball and mankiw ( 1994 ) discuss convexity of the phillips curve in the context of adjustment / menu costs. ball, mankiw and romer ( 1988 ) show that in a new - keynesian framework the frequency of price changes increases when the average rate of inflation increases, because firms must adjust their prices more frequently to keep up with the general rise in prices. as a consequence, the slope of the phillips curve increases with the level of inflation. stiglitz ( 1986 ), fisher ( 1989 ) and akerlof, dickens and perry ( 1996 ) developed models with downward wage and price rigidities. these models embed the fact that workers are more reluctant to accept a decrease in their wages than an increase. at times of excess supply, the slope of the phillips curve becomes an increasing function of the level of inflation. the theories that imply convexity rationalise relatively stronger expansionary monetary policy action during times of recession ( as price pressures induced by expansionary policy are expected to be smaller during recessions ). the consequences for monetary policy of the weakening of the link between the level of economic activity and inflation, if this weakening indeed happened, would be significant. first, it has consequences on the sacrifice ratio : if inflation increases as a result of shocks not related to domestic slack, then the cost of bringing inflation down in terms of output loss would increase sharply. second, if instead inflation becomes very low, monetary policy would have to stimulate economic activity more strongly and could lack effective instruments to do so. in sum, a flatter slope of the phillips curve makes controlling inflation either more costly or more difficult. naturally, when that flattening is associated with more strongly anchored expectations, the difficulties are mitigated. what this underlines is the need to carefully monitor the relative importance of different drivers of domestic inflation : inertia, expectations, economic slack, supply shocks and external variables. several methods and models are necessary for the task, as policy makers cannot rely on the perspective provided by a single tool. nevertheless, the fact remains that forecasters were not able to anticipate the disinflation for the euro