Indeed, the experience of countries such as Greece, Spain and Portugal confirms that a key element of their successful entry into the euro area was their success in controlling sources of inflation other than the Balassa-Samuelson effect. In particular, a balanced monetary and fiscal policy mix and the control of real wage increases have supported the disinflation process in these countries, and allowed them to advance in the process of nominal convergence without compromising the gradual catching-up in real incomes. 3. Monetary policy and exchange rate strategies  With regard to monetary policy and exchange rate strategies, most accession countries have already indicated their intention to join ERM II as early as possible after entry into the EU. The accession countries have also signalled their intention to adopt the euro as soon as possible, that is, after two years of ERM II membership. 2  BIS Review 92/2001  The whole issue of the timing of ERM II membership, both as to when to join and how long to remain in the system, is dependent on a somewhat more complex question, namely whether the discipline which ERM II imposes on its members is advantageous for the accession countries. The answer, in our view, is “yes”. Ladies and gentlemen, allow me to reflect on this question for a moment and explain why we hold this view. Being small open economies, most accession countries cannot disregard exchange rate developments when making their monetary policy decisions.
Only for more complex organizations, a more extensive technological infrastructure is needed. Let’s come to the answer to the question then. To have a well established, in other words, efficient risk management system, first we need to develop the risk culture within our organizations meaning that we need to make sure that at all levels every person understands the risks the institution is exposed to. It is the responsibility of top management to provide that kind of information by having a clear approach to risk, its appetite for risk and assigning responsibility for assuming and controlling risks. Therefore, the first step in risk management process is to identify the risks the institution is exposed to and to quantify those risks. Effective risk management requires that a consistent methodology be developed for analyzing risk. Important steps in risk management analysis are as follows: •  identifying the key financial flows;  •  determining the appropriate time horizon;  •  setting a benchmark;  •  defining the institution’s return objectives and views toward risk. As you all know, most progress has been made in the measurement of market risk and much work is now being done in many places to construct models for a better management of credit risk. Difficulties with credit risk measurement lies in the lack of statistics about individual default probabilities. Even if these default probabilities can be estimated reasonably accurately, it is still rather difficult to combine them into portfolio assessments.