The Riksbank is also involved when the candidate countries present their "Pre-accession Economic Programmes" (PEP) for the EU countries. These PEP programmes are exercises where the countries attempt to analyse and present their economic challenges in the way they will in future, as  BIS Review 9/2002  5  EU members, present stability and convergence programmes and consult on economic policy within the framework of the Broad Economic Policy Guidelines. Hopefully, the Riksbank will be able to contribute with analysis of economic activity and structural issues in these countries, not merely for our own forecasts but also in relation to the EU and ECB. What we can learn from the candidate countries Before I finish, I would like to go from speaking of what the candidate countries can learn from us to pointing out what we can learn from them. Several of the former planned economies are now in some areas better adapted to the EMU than today's EU countries. Several of them have, for instance, a flexible labour market and wage formation. This appears to have contributed to enabling the Baltic states to cope with the Russia crisis and the breakdown of the Russian market, without their reform efforts and growth coming to a standstill. This flexibility also makes them extremely well suited in this respect for a monetary union like the EMU. The preparedness to implement structural reforms also appears greater.
Under a fixed exchange rate regime the real appreciation takes place through higher inflation and real depreciation through lower inflation, while with a floating exchange rate it occurs through nominal appreciation or depreciation. A tight fiscal policy can counteract the extraordinary real appreciation due to capital flows. A strong central government budget also makes it possible to respond with an expansive fiscal policy if the capital flows are turned into outflows. However, this requires that fiscal policy has ample reserves. The convergence criteria for public finances in the EMU, particularly the target for a budget deficit no greater than 3 per cent of GDP, therefore function as sound targets for the candidate countries. Despite the recent criticism vis-à-vis the budget criterion I believe that 3 per cent is a sufficient margin for fiscal policy, as long as it is in balance over the cycle. Yet there are still risks in rushing to meet all of the convergence criteria – especially if EMU membership cannot realistically occur for several years. There is a discussion in academic circles on whether very low inflation figures, that is to say, much lower than most candidate countries have now, are really compatible with rapid growth and a fixed exchange rate. The export sector's rapid growth creates pressure on the domestic economy through the 'Balassa-Samuelson' effect and raises domestic prices, creating a 'natural' inflation. To then artificially press down inflation to very low levels could be overly ambitious.