, try to shift the payments onto the other countries. problems of another type have come to the fore with the past year ’ s weakening of the euro. when the mood is negative, every potential problem gets an airing regardless of its weight in practice. difficulties in small countries, for example in connection with inflation being considerably higher than in the core countries, can then be presented as a threat to the whole, with consequences for the euro ’ s exchange rate. rules and processes for promoting cohesion all the problems and risks i have mentioned were essentially well - recognised and thoroughly discussed before the emu was formed. various rules were therefore constructed to prevent what is called destructive diversity. the maastricht treaty, for instance, includes rules to prevent excessive government debt being dumped onto others. this is explicitly prohibited by the ban on government financing in the central bank. the treaty also rules out privileged access to bank loans as well as bail - outs by other countries or the eu as a whole. the most important concrete instrument for promoting cohesion is, of course, the eu ’ s convergence criteria for emu participation : low inflation, low interest rates, a stable exchange rate and balanced government finances. much has been said and written about these criteria. i have already suggested that perhaps it is not just these criteria as such that are the key to a monetary union that functions properly, although the part they have played in disciplining policy in a number of member states should not be underestimated. but i do believe they have had the important effect of contributing to a greater consensus than before on issues of stabilisation policy. the maastricht treaty ’ s institutional requirements concerning formal central bank independence and the legal infrastructure of the financial sector have also contributed to the consensus that has been achieved and which i believe is central for the proper functioning of emu. a remarkable degree of economic convergence throughout the eu was achieved in the second half of the 1990s. if one excludes greece, the gap between the highest and lowest rates of inflation among eu countries narrowed from 10 percentage points in 1990 to 1 % point in 1997. in 1995 the gap in the public finances extended from a deficit of almost 8 % of gdp in sweden to a deficit of 2. 3 % of gdp in denmark. by 1997 the gap had narrowed to a 0. 1 % surplus in denmark and a 3. 0 % deficit in spain. the emu process also led to more similar levels of interest rates. in many countries the instrumental

, for example the corporate sector, the level of technical development, wage bargaining systems and competitive pressure. economic shocks will therefore affect them differently. problems may also arise if economic policy in one country is markedly different from the general direction. in sweden, for example, the economic differences from the eu countries in the 1970s and 1980s were in large measure a consequence of self - imposed stabilisation problems. if a shock does hit a single country, a monetary union eliminates the possibility of mitigating its effects by adjusting the exchange rate. neither can this be done by implementing a national interest rate policy. instead, wages and prices need to be as flexible as possible so they adjust and counter the impact of the shock. wage formation is accordingly of major importance for enabling the countries in a monetary union to harmonise their business cycles without being hit by unemployment. another type of problem in a monetary union can come from differences in the construction of fiscal policy. a national currency and interest rate are no longer available as clear indicators of market confidence in a country ’ s economic policy. this means that a part of the forces which previously tended to discipline pressure for fiscal expansion and counter unduly large budget deficits no longer acts. that applies in particular to small countries, in that their mistakes can be concealed, at least for a time, in the overall development of the monetary union ’ s exchange rate and interest rates. the opposite applies if the large countries commit economic policy mistakes - the consequences are liable to hit the entire union. in theory, perhaps problems of this kind should not be all that grave. if a euro country ’ s budget is markedly underbalanced and money is distributed to the inhabitants, they ought to be prudent enough to set aside some income to cope with the strains that are bound to come when, sooner or later, the government finances have to be consolidated again. but things don ’ t work like that in practice, at least not sufficiently so. short - term budgetary expansion therefore normally leads to increased consumption and that in turn is liable to result in higher inflationary pressures throughout the euro area. all else equal, the end result will be that the ecb is forced to tighten its stance a little more. in that way, a less disciplined policy in one or more member states to some extent hits all the countries in the union. in the extreme case, it is conceivable that a country might deliberately refrain from managing a debt problem and, when the crisis becomes acute