on economic reform. during such a period, monetary and exchange rate policies should provide for sufficient flexibility and should take account of the specific circumstances of the country concerned. for instance, given the current levels of inflation, it may be wise for some countries to maintain a crawling currency peg for the time being. for other countries a stronger commitment – a fixed peg or a currency board – may be more appropriate. before accession, this can only be a unilateral decision. only after joining the european union can new member states participate in erm - ii, as indeed they are expected to, assuming that a credible peg against the euro can be established at that time. preconditions for stable monetary relations of course, linking the currency to the euro cannot be a substitute for conducting stability - oriented macroeconomic and structural policies. rather, any formal link to the euro should be preceded by policy measures which make the intended currency link a credible one. given today ’ s importance – 4 – of capital flows to exchange rates, such policy measures should also cover areas that are important to capital flows. allow me to say a few words on the approach towards capital movements. undoubtedly, hot money is a hot issue at the moment. restrictions on capital flows have proven less than effective in times when investor confidence turns sour. introducing controls to limit capital outflows in the middle of a crisis is doomed to fail. they may afford some temporary relief, but when people want to get their money out of the country, they will succeed in doing so in the end. what remains is long - term damage to investor confidence. liberalizing the capital account further is the more promising route. adequate sequencing of short - term capital inflows may be required in order to gain time for adjusting the domestic financial sector to the competitive pressures that follow from capital liberalization. it should be realized, though, that such an approach should go hand in hand with an improvement of supervision and a strengthening of the financial sector. this should be high on the policy agenda in eastern europe. there has been considerable progress on capital liberalization in these countries and it is expected that, under oecd rules, capital movements will be free of restrictions pretty soon. the major challenge now is to ensure that the restructuring of the financial sector keeps pace, an area where there is still much to be done. it is well - known that in the communist past many banks used to be a part of, or closely related to, the central bank. in

mr wellink considers monetary relations between the euro zone and new member states speech by the president of the netherlands bank, dr a. h. e. m. wellink, at the european finance convention in vienna on 23 / 11 / 98. i should start with a warning to those who favour early accession of central and eastern european countries to the european union. somebody once said the following about the part of europe i live in : “ i do not find northern europe an ideal zone for human habitation. it is a fine place for industrial productivity, but its climate breeds puritans and the terrible dictates of the protestant work ethic. the romans were right to pull out when they did. ” so please be well aware of whom you seek to live with in a more institutionalized setting. but, let me add immediately that times have changed. for instance, the romans have found it attractive to be reunited with us in emu. today, i want to discuss the issue of monetary relations between central and eastern europe and the european union. accession to the eu is understandably a hot issue in the countries concerned and it rightly guides their medium - term macroeconomic policy orientation. at the same time the turbulence in the global financial markets poses some immediate policy challenges. two issues are particularly at stake : ( 1 ) to what extent is eastern europe hit by the consequences of the asian and russian financial crises? and ( 2 ) what is the best policy approach in the current international environment? i will first discuss these two issues. later on, i will broaden my horizon and raise some issues related to the future accession of these countries to the eu. contagion? economies in transition have not been shielded from contagion effects, which started after the russian financial crisis. financial market volatility increased sharply. headline stock market indices significantly dropped in august and exchange rates were under downward pressure. however, the situation seems to have improved meanwhile. although it is probably too early for a final assessment, until now the effects on the real economy have been relatively limited, also because trade relations have dramatically changed in the past and their focus is now much more towards the west. the countries that had made significant strides since the beginning of the 1990s in establishing a well - functioning market economy have weathered the financial storms rather well. this is ample proof that they are on the right track. their main challenge is therefore to ensure that the ongoing stabilization and reform efforts continue even if, or should i say