In addition, the commitment to refrain from excessive deficits is also a necessary condition for the success of EMU itself. This is the case because if such a deficit occurs in one of the larger euro area members, the inflationary pressures resulting from that deficit could instil an upward bias in ECB interest rates. For accession countries, contained public spending and flexible labour markets are also necessary from the point of view of achieving nominal and real economic convergence. Excessive deficits would not only accentuate inflation differentials, undermining the ability of these countries to fulfil the Maastricht criteria, but could also crowd out private sector investments, delaying progress in structural reforms and convergence in income levels. Given that large deficits and labour market rigidities tend to weaken a country’s ability to achieve both nominal and real economic convergence, policies to address these issues are an integral part of the preparations which accession countries are making in advance of EMU. The rationale behind ERM II ERM II is a fixed exchange rate regime, involving the adoption of a central exchange rate against the euro in agreement with the ECB. This rate is then allowed to fluctuate within specified margins, normally +/- 15%, but narrower bands may be adopted subject to mutual agreement.
In view of the incompatibility of monetary policy autonomy, full capital account liberalisation and a fixed exchange rate, EMU participants have given up independent national monetary polices in favour of the  BIS Review 70/2002  1  free movement of capital and the adoption of a single currency. The main driving force behind this decision was the desire to overcome the obstacles to the completion of the Single Market and to progress towards monetary and, eventually, economic union. A single currency was a logical step in this regard. Given the constraints which the adoption of the single currency entails, the emphasis which the Treaty puts on containing fiscal deficits and on labour mobility is understandable. In this set-up, in fact, the adjustment to asymmetric shocks has to take place through fiscal policy and the labour market. Since labour mobility within the Union is still weak, however, in practice this means that the onus of adjustment falls on fiscal policy. Fiscal consolidation thus remains a necessary precondition for the success of EMU. Indeed, whereas it could be argued that the Stability and Growth Pact precludes fiscal policy from responding to short-term domestic needs, it is equally true that the constraints arising from that Pact are meant to ensure that governments in the euro area have the necessary room for manoeuvre over the medium-term. The presumption here is that by achieving close to balance or surplus positions, governments would be in a better position to deal with normal cyclical fluctuations.