environment. this also implies that the general call for structural reforms and sound fiscal policy is required in the euro area countries as well as the new member states. however, in the latter case, consistent and stability - oriented domestic economic policies are essential not only for successful monetary integration but also for taking full advantage of the benefits of eu membership and for the catching - up process in per - capita income levels. now let me speak in more detail about domestic fiscal policy and structural policies concerning financial, labour and product markets. sound fiscal policy first in emu, fiscal policy largely remains a national competency and may be used for coping with country - specific conditions. this characteristic has to be noted with cautious, however, given that the past experience of most countries shows that the use of discretionary fiscal policy for short - term demand management is extremely difficult to implement successfully. this stems from considerable time lags involved in implementing fiscal measures. nevertheless, a fiscal policy can have a positive effect on the economy via the “ so called ” automatic stabilisers. a proper functioning of automatic stabilisers requires sound fiscal policy. this issue is currently of a significant relevance given that many eu members exhibit considerable fiscal imbalances. in 2004, both some emu member states ( germany, greece, the netherlands and france ) and six new member states ( the czech republic, cyprus, hungary, malta, poland and slovakia ) were in an excessive deficit situation. although, the new member states have generally lower debt ratios than the euro area countries, they have two additional incentives to lower their government budget deficits. first, the failure to fulfil fiscal maastricht criteria could derail the entry to emu. second, reasonably sound public finances are crucial for an effective and exhaustive use of structural eu funds. at this point let me make a few remarks on the stability and growth pact. since the very beginning of the discussion on the reform of the pact, the ecb has strongly recommended preservation of the integrity of the corrective arm of the pact, with the nominal anchor of 3 % and the excessive deficit procedure, and to improve and make more effective the implementation of the preventive arm of the pact. it has always been our position. after the decision of the council of ministers on 21 march we said that “ it is imperative that member states, the european commission, and the council of the european union implement the revised framework in a rigorous manner, conducive to prudent fiscal policies.

%. recent years witnessed also impressive integration in financial market, in particular in money and government bond markets. at the same time, gdp growth among euro area countries continues to be closely correlated ( with an average correlation coefficient close to 70 % over the past 10 years ). in addition, the inflation differential declined. the unweighted standard deviation for 12 euro area countries dropped from close to 6 percentage points at the beginning of the 1990s to around 1 percentage point in 1999 - 2004. the dispersion of annual inflation in the euro area is similar to that of the 14 us metropolitan statistical areas, which has hovered around 1 percentage point in recent years. impressive economic integration has also taken place between the 10 new member states and the previous 15 eu member states and the euro area. aspirations of the new member states to join the european union and subsequently to enter the euro area served and still serve as a catalyst for far - reaching economic changes. the extent of already achieved economic integration of the 10 new members could be illustrated by several facts. let me start with trade integration. the trade links among current eu members have increased considerably in recent years. the share of the new member states in the euro area ’ s exports and imports doubled since 1995 and stands currently at around 10 - 11 %. in the new member states, exports and imports to the euro area accounts on average for around 40 - 50 % of total goods trade. these shares are even larger if one takes into account trade with the non - participating eu member states. economic integration in europe has also provided new opportunities for investment with a noticeable increase in capital flows in recent years. the asset share of foreign - owned banks in the new member states increased enormously in recent years and now stands on average at 70 %. some empirical studies find an increasing synchronisation of business cycle among some new member states and the euro area countries in recent years. 1 as economic integration has been increasing new member states made a significant progress with nominal and real convergence. discrepancies in average hicp inflation rates between the new member states and the euro area dropped significantly from on 7. 6 percentage points in 1997 to close to 1 percentage point in the last three years. similar developments are evident for short - term and long - term interest rates – with the spreads falling on average to below 3 percentage points and above 1 percentage point, respectively. it should be also mentioned that although the new member states made a headway in closing the gdp per capita gap versus the