The example of Japan in the 1980s suggests that consumer price stability may not be a sufficient condition for precluding bubbles in asset prices and financial instability. With trend inflation averaging two per cent a year, the situation in Japan in the 1980s was very close to what we now commonly mean by price stability. Yet the Japanese economy still moved towards a period of grave financial instability. Thus, the question practitioners have to consider is how to deal with a situation where asset price effects are taken into account with reference to consumer price inflation but where there may still be a risk of asset price bubbles that may lead to financial instability, a destabilisation of the real economy and a severe downward effect on consumer price inflation later on. One could argue that the effects of a large rise in asset prices on aggregate demand may be smaller than the effects of a large fall if such a fall increases general uncertainty and leads to more cautious spending behaviour. If the collapse of a bubble in asset prices has a much stronger effect than the preceding boom, it may be optimal to increase interest rates to raise the probability of bursting a bubble even though such a policy action may temporarily lead to lower consumer price inflation in the short term than otherwise would have been desired.
This implies that, when joining the EU, the new Member States will have to comply with all of the requirements outlined in the acquis communautaire which relate to European Economic and Monetary Union (EMU). Moreover, following accession, they shall each have to prepare themselves for the eventual adoption of the euro. Thus it is clear that the accession process and the entry of new members into the EU will have deep and wide-ranging consequences for the ECB and the Eurosystem. Of course, meeting the Maastricht convergence criteria is not a prerequisite for joining the EU. However, the introduction of the euro certainly puts some pressure on accession countries to make progress towards fulfilling the convergence criteria. In fact, we might consider their progress towards adopting the euro as part of a continuum, encompassing three distinct stages and crucial steps. These are: EU membership, participation in ERM II, and eventual adoption of the euro. The first of these steps requires implementation of the EMU-related acquis communautaire. Then, on the date of accession, new Member States will join EMU with the status of “countries with a derogation”. From this point onwards, they will be expected not only to treat their economic policies as a matter of common concern, but also to be committed to the eventual adoption of the euro, which should be an objective both of monetary and of other economic policies. This is a direct result of the fact that, as I mentioned earlier, no new opt-out clauses are to be granted to the accession countries.