rather than increase, cross - country divergences in inflation. fiscal policy should also be in a sustainable position so that automatic stabilisers can operate fully. at times it may even be appropriate for fiscal policy to seek to offset divergences. it is certainly the case that there is little to be gained from discretionary pro - cyclical policies. rather, economic cycles could become more pronounced, resulting in costly adjustment taking place in downturns. the point i made earlier about small countries is relevant here. euro area monetary policy is not significantly influenced by the inflation rate of a small country. it is therefore important for small countries to have the flexibility in other policy areas to offset inflation. of course, large countries would also gain if they undertook structural reform and avoided pro - cyclical fiscal policy. and there could be times when it is appropriate for large countries to use national policies to offset divergences. i would merely make the point that the costs of not being flexible might be greater for small countries in the event of a downturn. monetary policy after enlargement i would also like to briefly discuss how these issues apply to enlargement. first, the points made regarding small countries currently in the euro area apply with even greater force to accession countries. given the relative size of accession countries, monetary policy for the enlarged euro area will be little influenced by their inflation rates. accession countries are in general less converged in real terms than the initial emu members were when monetary union began. this is true when measured on the basis of gdp per capita, and when adjustments are made for differences in purchasing power. real convergence may therefore take a considerable period of time. ongoing convergence, eu membership, and eventually adoption of the euro, could all result in economic shocks that mean monetary policy requirements in an accession country differ from those in the euro area as a whole. given these factors, the extent of the difference in monetary policy requirements could be greater or more protracted than is the case for small countries currently in emu. to minimise the economic and social impact of divergences, it is important that accession countries have flexible economies, sound financial systems, a solid fiscal position, and a well - developed institutional framework. arguably, accession will therefore have greater consequences for countries now than was the case previously, in the sense that they are less converged in real and institutional terms than initial emu members. a cautious approach to the adoption of the euro therefore appears appropriate, as premature adoption

, there appears to be a general consensus that business cycles have converged to some extent over the past decade or two. as a central banker, i am naturally interested in inflation differentials, and these are certainly lower now than they were 10 or 20 years ago. for example, inflation rates among current euro area members ranged from 21 % in italy to 5 % in germany in the last quarter of 1980. by the second quarter of this year the range was only 3½ percentage points. naturally, divergences do remain, and these reflect a number of factors. some divergence is due to a process of convergence as countries catch up to euro area averages, the well - known balassa - samuelson effect. this effect explains how productivity growth during a catch - up process can result in higher inflation without undermining competitiveness. country - specific policies, including fiscal policy and regulation, also result in divergences. finally, countries have different industrial or sectoral concentrations. differences in the economic performance of various sectors will therefore be reflected in cross - country divergences. these factors are not going to disappear immediately, but may diminish as price and income levels converge and through continued deepening of the internal market. however, we cannot be sure how rapidly they will diminish, nor can we be certain what level of divergence will be normal in the long run. in addition, the process of convergence will not necessarily be continuous. for example, inflation differentials have widened a little over the last year or two, although they remain much smaller than they were a decade ago. for small areas within a monetary union, a common monetary policy does have some specific implications. small countries have little influence on the euro area inflation rate, which is a weighted average of national inflation rates. if inflation rates in those small countries diverge from the euro area average, that has relatively little impact on the overall monetary policy stance for the euro area. consequently, it is possible for smaller countries to temporarily have growth rates and inflation rates that differ from those that would result from a national monetary policy aimed at maintaining price stability at the country level. large countries could also be in this position. if inflation is well above the euro area average in one country, but below it in another, monetary policy may not contribute to narrowing the divergences. where such divergences are not the result of catching - up processes, national economic cycles could potentially become more pronounced. some euro area countries are arguably in