citizens more closely in the european project. in other words, the future prosperity of europe hinges on our ability to complement monetary union with economic union, fiscal union and financial union. this more advanced institutional architecture will in turn need to be embedded in some form of political union that engages citizens more deeply in european decision - making. as a result, joining the euro area in the future should imply greater sharing of sovereignty and a deeper european accountability than it did ten years ago. bis central bankers ’ speeches the institutional challenge is the first major challenge with which we are currently confronted. we have already made much progress in addressing the challenge. but a great deal of work remains to be done. the economic challenge the second and complementary challenge is economic. the benefits of adopting the euro are greater the more consistent the economic structures of existing and prospective members are. convergence can be broadly defined as a process in which cross - country differences in economic structures are reduced over time. the success of the convergence process ultimately depends on the sustainability of the underlying policies. shortcomings in the process of convergence across euro area members have been at the root of the challenges we have faced since 2010. but i am pleased to report that progress in addressing those shortcomings is being made. external imbalances and fiscal imbalances are starting to be unwound. efforts to regain price and non - price competitiveness are bearing early fruit. deleveraging is generally proceeding in an orderly way, even though credit flows to the real economy seem to be negatively affected in parts of the euro area. debt is being reduced in some countries, while others are devising strategies to make debt reduction sustainable over time. and financial sector weaknesses are being addressed along with their links to sovereign risk. as i have said, progress is being made but much still needs to be done. the recent experiences of some current euro area members also serve as a cautionary tale to eu members bound by the treaty to adopt the euro in the future. i will now turn to the challenges facing these countries in the process of convergence. 2. the perspective of eu countries which have still to adopt the euro the framework for convergence with two exceptions, all eu members that are not yet in the euro area are expected to adopt the single currency on meeting certain convergence criteria. as you know, the treaty defines these criteria along three dimensions. the first dimension is the degree of nominal convergence with the euro area. this implies achieving price stability ; ensuring the sustainability of the government ’ s

at some point in time. depreciation of the currency may in turn further fuel inflation and offset the impact of economic stimuli through negative balance sheet effects on consumption and investment. structural policies the second building block is structural policy. the sustainability of nominal convergence is to a large extent conditional on a sufficient degree of structural, or real, convergence. a broad indicator of the degree of real convergence with the euro area is the catching - up of per capita incomes and price levels of new members with those of the euro area. convergence in real per capita gdp levels has to be fostered by far - reaching structural and institutional changes aimed at enhancing the growth potential of the economy. such reforms typically aim at strengthening the flexibility of adjustment mechanisms in the economy and improving the business environment. when goods and labour markets are rigid, inflation and inflation expectations may remain high even in the presence of monetary regimes committed to the achievement of price stability. both governments and social partners share responsibility for ensuring that wage determination takes sufficient account of labour market conditions and does not jeopardise competitiveness and employment. active labour market policies should tackle persistent bottlenecks, such as skill mismatches. finally, protection of vested interests in the product markets and lack of mobility and adaptability in the labour markets undermine job creation, in particular for young and less qualified workers, as well as for all those who face problems entering the labour market. lowering barriers to entry will increase competition, particularly in those domestic service sectors that are sheltered from international competition, and thus support price stability. economic growth led by the private sector needs to be fostered by a stable and business - friendly policy environment. in this respect, governments should strive for transparency and predictability of the policy regime, a low compliance burden, and effective governance in applying the rule of law. fiscal policy it is also crucial that the achievement of price stability is supported by sound fiscal positions, the third building block of convergence. irresponsible fiscal policies can jeopardise credibility, as higher inflation becomes desirable to reduce the real value of government debt. fiscal policies should be sustainable and oriented to the medium term. they should further aim at mitigating undesirable trend growth differentials through “ high quality ” expenditure and tax policies. in particular, high and inefficient public expenditure can put a brake on economic activity by imposing a high tax burden on the economy and channelling resources into unproductive uses. financial policies the fourth building block is financial policy.