generated by the systematic and credible consolidation of government budgets and the anchoring of inflation expectations at a low level prior to monetary union. the new member states are just in the process of experiencing this. but the “ convergence dividend ” cannot be perpetuated by a declaration of political will. entry into european monetary union has to be prepared in a credible manner. in saying that, country - specific differences are possible and, given the great diversity that exists, necessary, too. four of the ten new member states are practising active inflation targeting. three are already members of erm ii. two other countries are gearing their monetary policy to an exchange rate peg ( to the euro and to a basket of currencies ). ultimately, the crucial need is to pursue a credible stability - oriented policy. falling inflation rates – and even falling inflation expectations – lead to a growing “ convergence dividend ” of lower long - term interest rates and greater investment certainty for enterprises. besides nominal convergence, it is also important to assess the degree of real convergence. this covers such topics as business cycle synchronisation, the degree of trade and financial integration, factor mobility as displayed in wage and price flexibility, and the risk of asymmetric shocks and the capacity to absorb them. interlinkages between monetary and fiscal policies it is not least fiscal policy that benefits very considerably from the “ convergence dividend ”. increased growth and a declining interest rate burden significantly widen the scope of fiscal policy action. fiscal policy thus benefits directly from a stability - oriented policy. but fiscal policy can and must also contribute to a stability - oriented policy. allow me to bring to mind the three fundamental reasons for limiting the general government deficits under the terms of the stability and growth pact. in the long run, stable money can only exist if there are stable public finances. that applies, above all, to a monetary union in which the stability costs of government debt and deficits also have to be borne by others. only budgets which are on average over the cycle balanced in surplus provide scope for the steadying influence of the automatic stabilisers and at the same to reduce long term debt levels. not least, we have to counter the growing costs of government debt at an early stage. i am referring here to the existing explicit and implicit debt and to the fact that due account has to be taken of the dramatic demographic trends in an aging society. sound fiscal consolidation contributes directly to credible macroeconomic stabilisation. if we

investment position. therefore, in tackling exchange rate risks, new member states should be keen to ensure sound public finances, stable financial systems, and macroeconomic stability. summing up, i would like to point out that successfully coping with the growing diversity of the eu economy after enlargement requires that monetary, fiscal and economic policy fulfil their respective tasks. to my mind, the large burden of public finances and the excessive deficits deserve our special attention and decisive action by fiscal authorities. countries inside and outside emu must adhere to the stability and growth pact. i do hope that the continuing fiscal laxity and reluctance to undertake structural reforms in the current euro area will not undermine the discipline needed for convergence in the hitherto successful new member states.