In many countries, it is important to enhance the flexibility of labour contracts and wage-setting to enhance employment growth in a lasting manner. Over the second half of the 1990s, efforts made by some euro area countries to improve the functioning of the labour marked appear to have been fruitful in fostering employment growth and promoting a more job-intensive output growth compared to the late 1980s. In particular, labour market reforms implemented in the second half of the 1990s seem to have benefited those groups facing particular challenges when trying to enter the labour market, such as women, the youngest and oldest age groups and the lowest educated. Reforms are also needed that allow wages to reflect more strongly regional and sectoral productivity differences. This will make the whole economy more flexible and better able to absorb economic shocks. These measures have to go hand in hand with product market reforms and reforms of the pension and health care system. Such reforms are essential to contain expenditures on pensions and health care. They will not only be needed to reduce non-wage labour costs and increase incentives for job creation but also to ensure the sustainability of the social security systems. BIS Review 23/2004  3  The surveillance of fiscal policies We have been very bold in Europe in setting up a single currency. I remember all the remarks made by American friends during the 90's. They were easy to sum up: “You put the cart before the horse.
And in some countries, the process of catching-up in real incomes has been slower than expected at the start of transition. For acceding countries as a whole, per capita income today is less than half of the average of the EU. Given the low starting point for most countries, increasing prosperity and living standards will be a major policy objective for quite some time. In view of that strategic objective, one has to underline that prudent macroeconomic policies are key to support and facilitate progress towards higher GDP-per-capita levels. Accession to the EU is expected to have positive effects on the countries' prospects for convergence. The full integration into the internal market will increase growth prospects and thus foster the catching-up process, mainly through trade and investment (FDI), together with lower interest rates. New Member States will have to implement and enforce the “acquis communautaire” of the European Union, which they have adopted in the course of recent years (excluding, for the time being, those areas where transitional arrangements apply). The EU has also been preparing intensively to make enlargement work. Within the realm of central banking, the Eurosystem has been engaged since 1999 in a constructive and ever more intensive dialogue with the central banks of the new Member States. Already since the signing of the EU Accession Treaty in 2003, the Governors of the national central banks of acceding countries have been taking part as observers in the General Council of the ECB.