of such fundamental things as financial intermediation, credit growth, the exchange rate and real convergence in general. these are all very important factors that have to be taken into account when making a decision on the euro strategy or indeed on erm ii entry itself. it is therefore worth waiting with setting out very specific euro adoption plans for hungary until the dust settles at least a little bit. in the meantime, the slovakian experience with the euro, starting next year but showing its implications already in the recent unfolding of the crisis, will provide a good natural experiment for the other new member states, and will no doubt be closely watched.

an influence on one another. still, there is only one participant that is sufficiently large and has the coordination potential to break the negative spiral : the government itself. individual banks by themselves are unable to do this ; even if any of them started lending, it would have no noticeable effect at the macroeconomic level. the government, on the other hand, might be able to provide incentives to the banking sector to boost lending by reducing and stabilising the burdens on the banking system and making the regulatory environment more predictable, which could eventually place the system onto an equilibrium path. consequently, a “ compromise ” is called for between the government and banks, or else we cannot expect lasting growth to emerge. and the first move must be made by the stronger player by restoring the climate of trust. and finally, the third task : the central bank must achieve price stability similarly to other public entities, pro - growth monetary policy also needs to play its part in creating a predictable environment with the lowest possible risk level for economic agents. the central bank can contribute to this most efficiently by achieving price stability. this is also a precondition for reducing long - term interest rates and avoiding excessive exchange rate volatility. what does a central bank need to do to create price stability? over the past two decades, price stability has been achieved in almost all developed countries and a number of less developed ones. the experience of these countries shows that the most important element of success is the transparent and systematic operation of the central bank. inflation expectations become anchored, that is, lasting price stability and monetary policy itself become credible, if the central bank clearly states its inflation target, and economic agents see that the central bank will act to curb any developments threatening to result in a persistent deviation from that target. this conduct is greatly facilitated by a supportive fiscal policy. expectations of exchange rate devaluation due to the increasing fiscal imbalance and the expected adjustment measures, bis central bankers ’ speeches unknown as yet in every detail, can unsettle inflation expectations despite the best efforts of the central bank, and thus offsetting inflationary shocks may cause an output loss. it is no accident that in most countries the adoption of inflation targeting coincided with the strengthening of fiscal discipline or the compliant nature of fiscal policy. in hungary, ever since the introduction of inflation targeting in 2001, the central bank has unfortunately had to work against a headwind in its effort to achieve its statutory objective of price stability, against a backdrop of fiscal policy which fuelled