Transition report press conference

22 October 2002

MR HIDAY: This is the Transition Report 2002 Press Conference. I'm Jeff Hiday, Head of Media Relations. Just to make a quick introduction of the people we have here at the front table: Peter Sanfey, Senior Economist; Willem Buiter, Chief Economist; Steven Fries, Deputy Chief Economist; and Samuel Fankauser, Senior Economist. Willem will make some opening remarks and then everyone will take questions. It would be helpful if you could identify yourself for the recording when you ask a question. In a special improvement to the TR process, we will have sandwiches coming in a little later. I don't know if that is an incentive or a disincentive, but they will be here.

Willem?

MR BUITER: Welcome to this launch of the Transition Report. It is our ninth in a series that started back in 1994, three years after the Bank was founded. Like the eight that went before, it falls into two parts. There is a structural reform chapter, chapter 2, institutional reform; a macro-economic survey chapter, chapter 3; and two thematic chapters which this year addressed the issue of the agricultural sector, the rural economy and agribusiness in our 27 countries of operations. These thematic chapters change year by year. Last year it was energy in transition, the year before that human capital, employment skills and transition. We have cut a very wide swathe through the various sectors and institutional features of the transition economies.

The editorial team for this year's product consists of the three people you see here with me, plus Simon Commander. I myself am here just for the ride; I have the pleasure of launching it, but the editorial responsibility falls squarely on Steven and his fellow musketeers.

The message of this report on the macro-economic and overall development side is that our region is confirming what we hoped would be true, that a record of institutional reform, structural reform and sensible macro-economic management will deliver growth and better economic performance across the board. We are seeing, I think, for the first time very clearly in our region the benefits of what has been achieved so far through what has often been a difficult period of institutional change and structural reform.

Our region's macro-economic performance was again better than the global average. Among the larger world regions, only emerging Asia - China, Korea, et cetera - have outperformed our region, but with the world as a whole likely to do a rather miserable one and a half per cent a year, our region is growing at a rate just below 4 per cent, unless there is a fall in the last two months of the year, which is unlikely. For next year, we expect that this kind of growth performance will be maintained or even slightly enhanced. Point estimates are a mug's game, but our point estimate for next year is 4 per cent for the region, which, if we believe the OECD and the other global market economic forecasters, will again be a somewhat better performance in the region than the world economy as a whole.

We are seeing, I think, the rewards for past reforms and for good or better policies, which is also reflected in the growth of FDI to the region. As you know, globally, risk appetite has taken a beating, and global FDI into emerging markets has gone down this year by just over 40 per cent. We have increased not just our share of global FDI but even the total amount, and we expect that this will be maintained again in the year to come. To those that have demonstrated that they can do the right thing, good things are being given, and it is encouraging to see that.

Note, however, that in the FDI story there is another message. FDI is highly concentrated first in the advanced accession countries, the ones that are likely to join the European Union in 2004, and outside these advanced accession countries it is overwhelmingly concentrated in the extractive sectors - oil, natural resources, things like that. In the CIS, for instance, we still have little FDI going into manufacturing services of a non-extractive kind, which shows that, while there has been progress, and a global economic community response to that, it is still uneven, and the institutional change that has paid off so handsomely in some dimensions has to become much more widely based in order to deliver value for the region as a whole and for a broader cross-section of the population.

In the report you will also find that Mr Gershon Krone's (?) hypothesis of challenge and response is playing itself out to a certain extent, even in our more lagging regions. Some of the laggards in reform have actually been among the countries that have made the largest improvements. So there is some real hope that there can be catch-up and convergence not just of the front runners to the existing industrial global elite, but also by those queuing at the back. We see this most spectacularly, of course, in a very late starter, Yugoslavia, which after 10 years of Milosevic had reached the nadir of economic performance, but which in terms of institutional reform now for the second year in a row shows the largest improvement across the board.

We see the same encouraging signs that some of the laggards, at any rate, are catching up in the second round of a fascinating survey that has been conducted jointly by the EBRD and the World Bank called BEEPS, Business Environment and Enterprise Performance Survey. This has looked at 6,000 enterprises over 26 countries of operations - one country fell out of the sample for reasons that will not surprise you when I tell you it was Turkmenistan - so not all countries are catching up. It shows that across a very wide range of countries the businessman's own perception of the quality of the business environment has improved. There are still problems of corruption, still problems of inefficient taxation, but the problems are becoming less acute. There is clear improvement in the business climate.

Analysing this kind of huge survey and relating it to a survey done three years ago is no simple matter. One obviously has to try to correct for the structural and the cyclical factors in all that, but I think the message that comes through is very clear. There have been gains across the board in the business climate - not quite across the board but in the vast majority of countries - and the greatest gains were made by some of the less advanced countries in south-eastern Europe, what used to be called the Balkans, and in the CIS.

We also learn from this survey, which goes down to individual enterprises, differentiated by size, by ownership, by ownership history - whether they are privatised, whether they are newly emerging firms, whether they continue to be state-owned firms - that there is a lot of information that can only be obtained by going to the firms in their full heterogeneity and that we do not pick up in our aggregate transition indicators that we have been publishing now, with some retro-active work, since 1991. There is a wealth of information about the business climate that teaches us a lot.

Let me say something very briefly about the thematic chapters, agriculture and the rural transition. These are important sectors in our economy because in some of the countries of operations the majority of the population and the labour force is currently still engaged in the rural sector. Even in the most advanced countries, there are special problems in the agricultural sector that are not found to the same extent anywhere else in the economy. Basically, in our region agriculture has been the stepchild of the transition, and the rural economy generally. Productivity improvements have been the lowest. Poverty is greater. Provision of rural services is worse than provision of urban services. So we have an area there that has not yet been really pulled into the transition process and transition progress that most other sectors have been going through.

There are, of course, external causes for this poor performance: the fact that the markets - not just directly for agricultural goods but also for processed agricultural goods in the industrial world - for the products of our countries are often highly discriminatory and highly protectionist does not help. Market access remains an issue, but even allowing for that, low productivity reflects a failure of reform at the rural level, a failure of land reform and a failure of other reforms.

Let me leave it at that and leave it to my colleagues to answer all your awkward questions.

MR HIDAY: Maybe I could say one more thing before we take questions, which is that, of course, Mr Buiter can cover the full range of questions, but Peter Sanfey worked on the macro chapters and is particularly knowledgeable about south-eastern Europe. Steven Fries can handle any of the questions, but particularly about the survey. Sam is particularly knowledgeable about the agriculture and rural transition chapters.

Mark?

MARK MILNER (Guardian): Forgive the commercial, but there was an article in today's Guardian which basically says that the reform process and the prizes on offer - like membership of the EU and membership of NATO - are nothing more than devices to force countries to buy arms they do not need, to accept dumped agricultural produce from the European Union and to sell off their best assets to foreign investors. I must admit I stuttered a bit over the Cornflakes at that, until I turned to the Transition Report and looked at two of the most basic economic indicators, and that showed me that life expectancy in the CIS is now worse than it was in the Brezhnev years, and then I looked at the two countries that were mentioned in this particular article, the bad boy Belarus and the good boy Lithuania, and the percentage of people living below the poverty line in Lithuania is twice that of Belarus.

How would you respond to criticism that the whole economic reform process is simply either at best a major failure or at worst, a piece of Western exploitation?

MR BUITER: I would think that view would be as badly founded as it is emphatically asserted. There are indeed, I think, throughout the region increases in poverty, and in a number of countries, especially in the CIS, as you point out, some vital indicators like life expectancy, especially for males, have declined.

The first and major cause of this social deterioration, which we find in some but no longer by any means in all countries, has been the collapse of the communist political system and the central planning system. It was not as if in 1991 in our region people just said, "Let's reform. Let's push people out of the state sector into the private sector and let's spend less on health and education." The communist system as a comprehensive system collapsed, and the chaos and dislocation, and the often radical weakening of the power of the state as a collector of revenues and as a provider of key basic services, was something that was a given when the reform process started. It does not mean that no mistakes were made in the reform process. After all, how many times have we run this scenario before? Never. We have seen revolutions that replaced capitalism with communism. We have never seen revolutions and systemic collapses that replaced communism with capitalism and a form of open society with democratic governance. The challenge was enormous.

The weaknesses you are pointing out are there, but they are a function by and large of the weakness of the state and the weakness of public administration, and the inability therefore to marshal the resources domestically into key public services like the health service and education.

The negative picture you draw is not universal. Quite a few of our countries, a growing number, in terms of average per-capita income are undoubtedly doing better than they did under communism. That is true for most of the accession countries now. Others, thanks to three years of positive growth throughout most of the region, are catching up to the levels that they last achieved under central planning. There has been more inequality, at least as we normally measure it. Inequality under communism is, of course, very hard to measure because it has to do with preferential access not on market terms, not to prices paid, to goods, services and privileges. That metric is not as easily comparable as the distribution of recorded consumption or of wealth or income. But there is no doubt, I think, that there has been an increase in inequality and also in many countries an increase in poverty.

These things need to be addressed. They are, I think, at least initially, the inevitable by-product of the collapse of a social and economic system. The kind of work that we do as a Bank, creating private enterprises, sustaining and encouraging private enterprises that can support productive employment throughout the region and provide the resources that can be used, among other things, to address the social problems, is vital; there is no alternative; there is no going back. The governments there have, of course, their own political priorities and their own ways of handling these, and even if we do not agree with all of them, we can still make a difference by working as we do.

MR HIDAY: David?

DAVID CHANCE (Reuters): On pages 45, 46 and 47 you run through the accession process. You point out that a number of countries - Poland, Hungary, Czech Republic, et cetera - are already running high fiscal deficits that need to be reined in, that they are facing more spending demands to meet the concerns of the acquis, that they cannot meet the Maastricht criteria, that the requirements of Maastricht may mean a cut in spending to meet those criteria, and at the same time central banks may have to tighten in the pre-euro stage.

How do you square that circle? Not all of these things can be carried out at the same time as ensuring that they get the same kind of growth that is going to raise them to the living standards of western Europe. You just cannot do it. What is going to give somewhere? Is it desirable in any way for these countries to even think of implementing the requirements of the Stability Pact, especially at a time in western Europe when the Stability Pact is being questioned?

MR BUITER: The Stability Pact is part of the acquis. If you join the European Union, you are subject to the Stability Pact. Whether or not you are going to be subject to the Maastricht criteria, the 3 per cent rule, depends on whether you plan in the near future to become a member of the currency arrangements. Remember, EMU membership is also part of the acquis. These countries all, when they join, are members of EMU, unlike the UK, which has an opt-out. What they will have, of course, is a derogation until the time that they meet the Maastricht criteria. They are members; they are just not in the third phase or the third stage.

What you are describing, the large deficits, the inflation rates above the levels that would be compatible with one of the Maastricht criteria, suggests that a number of these countries would not find it desirable to join EMU, to adopt the euro, at the earliest opportunity. They would still be subject, whether or not they adopt the euro, to the Stability and Growth Pact, and as a requirement for balance over the medium term, the budget should be either close to balance or in surplus. That is the exact wording. Clearly, how tight that will be will depend on the interpretation of "medium term" and on the interpretation of "close to".

The countries that currently are running 5, 5½, 6 per cent deficits, only a small part of which is cyclical because except for Poland most of these countries are still growing at a reasonable rate, they would, I think, have trouble meeting even that part of the Stability and Growth Pact criteria that does not include pre-qualifying for adoption of the euro, which everybody has to satisfy, including the UK and Denmark today. These countries are going to be faced with a challenge. The spending demands of the acquis will be partly accommodated, of course, by transfers from Brussels of 3 per cent of GDP for some of these countries. That covers a fair chunk of it but not all of it. For the rest, they will have to either re-prioritise other spending categories or raise revenues. Many of these countries already have very high levels of fiscal burdens by most standards, certainly by the standards of countries with comparable levels of income.

In brief, it is going to be fiscally a difficult situation for many of the accession countries, but it would, of course, be fiscally a difficult situation for them even if they were not actually going into the European Union, because the need to do something about deficits of 5-6 per cent of GDP, and the need to catch up on infrastructure spending and the need to catch up on environmental expenditures are there, regardless of whether you are a member of the European Union. They can crystallise or emphasize the focus through this. So there will be a real fiscal dilemma faced by these countries.

One of the things we can do, of course, and these countries can do for themselves is enhance the business climate to such an extent that in-flows of foreign private capital can take care of those long-run investment needs that do not have to be met by the government. If the government can shed some of its tasks, privatise it, spin it off, in ways that unburden the budget, that will be an extremely valuable contribution. So private foreign investment can be a contributor to the mitigation of the fiscal problems of these countries as well.

MR HIDAY: Stefan?

STEFAN WAGSTYL (Financial Times): I am very interested in the business conditions survey, and in particular corruption, the way you think conditions there have improved as well as general business conditions. To what extent is this improvement in corruption simply a legitimisation of previous theft? In the old days you might have had to bribe the thugs to go away; now you simply employ them as a security company. The same might apply in a host of other areas, but using that as an example, do you think that this explains some of what appears to be a decline in corruption?

MR BUITER: I just want to say that in the minds of some economic thinkers, of course, all taxation is simply a legitimisation of previous extortion. This legitimising of things is a good thing, if they are made transparent and the way they are carried out follows rules and regulations. Legitimisation is nothing to be sniffed at.

MR FRIES: On the more general point [laughter], on how confident we are in whether the conditions, particularly with respect to corruption, have improved in the region, I think that the comparison of the two rounds of the survey, the first in 1999 and the second undertaken this year, gives us fairly clear and consistent results, at the level both of business perceptions and also some of the more specific assessments that we asked the respondents to make with regard to the incidence of corruption: these showed clear signs of improvement. One of the encouraging results is that the proportion of firms in the region that report paying bribes frequently has actually come down. That is a sign of real progress, that the incidence of corruption across firms in the region is on a downward trend. That is a fairly consistent result across most but not all the countries which the survey covered.

That is also supported, but we have to be even more careful in interpreting the survey results with respect to the proportion of sales that the firms report as having paid in the form of bribes. Here there is also some sign of improvement, that firms are paying a lower share of their total sales in the form of bribe payments, various aspects of bribe payments. So at that level it is becoming less onerous, but here you have to be careful in interpreting those figures, because it is also true that, in the period between the two surveys, sales and firms have grown significantly, so this has been a period of relative prosperity. One might anticipate, simply because the denominator, if you wish, in that calculation has improved, that it would show some sign of improvement.

I would be more cautious in interpreting the latter figures, but I think the incidence of bribery and corruption across firms is a strong sign that firms are experiencing a more favourable business environment, at least in that particular dimension.

In terms of the legitimacy of the transformation of previous bribe payments into more legitimate activities, I would simply make the cautionary remark that it is not just in the transition economies where firms pay for private protection services. It is a worldwide phenomenon that firms do pay privately to protect at least aspects of their security and property rights. A more nuanced interpretation of that is needed.

MR BUITER: It is important that, while the improvements in bribery and corruption are widespread, they are not uniform. There are exceptions. Also, the evidence that we cite from the survey is consistent with completely independently obtained estimates of the degree of corruption across countries from sources like Transparency International. They rank Estonia and Slovenia above at least several existing EU members in terms of the overall extent of corruption. Our data support that. So there is confirming information. There are still problems, but in most of the countries of operations - and there are exceptions - they are getting better.

RAINER HELLMANN (EU Magazine): I have two questions, one on corruption and the progress in transformation. How are the eastern Asian countries advancing, and is there an effect because of your forthcoming meeting in Samarkand already in Uzbekistan? Do you see any progress there? The second question is on currencies. You have prepared these Transition Reports for nine years now. Are there differences in progress in eastern European countries according to their currency arrangements, currency boards or pegging to foreign currencies like the dollar and now the euro?

MR BUITER: I take it the first part of your question relates to the Central Asian countries.

RAINER HELLMANN: Yes.

MR BUITER: As you know, we have five central Asian member countries: Uzbekistan, Turkmenistan, Tajikistan, Kazakhstan and Kyrgyzstan. The survey we talk about was finished in only four of these. In Turkmenistan we were not able to complete the survey in the way that we would have wished to. But given the general standard and level of reforms in that country, I think one can draw conclusions fairly easily.

Central Asia is one of the regions where progress has been much more mixed. We see that at least two of the countries that reported an increase in the frequency of bribery were central Asian ones. In respect of the third one, Tajikistan, we do not have data for 1999. We did not do the survey there, so we cannot compare it over time. In Uzbekistan, the comparative survey shows a reduction in the extent of bribes. So the picture is a very mixed one and it is clearly one of the regions where the challenges of institution building were greatest. Remember, these were countries that had independence thrust upon them. Unlike the Balkans, they did not actively seek independence, trying to restore past nationhood which was still remembered. Uzbekistan, Kazakhstan, Tajikistan, and Kyrgyzstan had the joint challenge of building a market economy from the ruins of central planning and creating a state. So one would expect that this combined political, economic and indeed social transformation would be especially challenging, and the data confirm this.

In terms of exchange regimes, we have a mixed bag in our countries of operations. We have currency boards among the eight of our members that are headed for the gate in 2004. We have Estonia and Lithuania with a currency board. We have Latvia with a fixed exchange rate vis-à-vis the SDR still, for reasons known only to them. The other countries all have forms of mixed float, managed float. Hungary has formally adopted the ERM stage 2 float within a band, with a central peg in terms of the euro, mimicking in a way the two-year ERM membership period that is part of the requirement for euro adoption as well as for EU membership. Others have various forms of more or less free floating. So we have a wide variety.

The very small countries peg or have a currency board. The slightly larger countries float, after a fashion. Remember, even the largest country in the region, which is Poland, is still by the normal metrics of international economics a small, highly open economy.

MR HIDAY: Sylvie?

SYLVIE LANTAUME (Agence France Presse): In terms of transition, would you say that Turkmenistan and Belarus are failures for EBRD?

MR BUITER: We are not head teachers handing out report cards saying "Should do better." It is clear when you look at our aggregate transition indicators, or at any other indicators of reform and progress, that the two countries you mention have made the least progress. The reasons for that are many. Many of them are very history-dependent. It is clear that the challenge for these countries to get going is growing year by year. Belarus will find itself in 2004 on the new frontiers of an enlarged Europe. It is quite staggering that they will be an immediate neighbour of the European Union. That, I think, will be good news because the demonstration effect of what happens next door will put additional pressure on the domestic political leadership to finally become serious about both economic and political reform. Turkmenistan, as you know, is not as favourably situated geographically. There are few neighbours from which they could derive great insight as to how to run a market economy, so the challenge there is all the greater, and it will require, I think, major political change before the economy can be led in the direction of greater market orientation.

STEFAN WAGSTYL (Financial Times): Could I follow up on that? On at least two occasions in the report, and there may be others, Uzbekistan is bracketed with Belarus and Turkmenistan as being significantly slow in progress.

MR BUITER: Yes.

STEFAN WAGSTYL: What message are you trying to send to Tashkent in advance of next year's Annual Meeting?

MR BUITER: Next year's Annual Meeting will be a special one for us because it is the first time in the 11-year history of our Bank that we will be having our Annual Meeting in Central Asia. We have been in most other parts of our world, but not yet in Central Asia. Uzbekistan is the heart of Central Asia, it is the largest economy, and it is also, as you pointed out, one of the countries where the level of progress has been very low - somewhat better than Belarus and Turkmenistan but not much - and where improvements have stopped; there is no progress in our aggregate indicator, anyway, since last year.

The message we will be taking there will be the same message that we take to every country of operation that we work in, and that is that progress towards a market economy and towards a more open political system are necessary conditions for sustained economic development. Without economic and political reform, the fruits of transition that are now being reaped by the successful transformers will not be reaped in Uzbekistan. It is a message, of course, that we have spelt out many times, but we have to continue spelling it out clearly and unambiguously until it registers and is expressed in concrete reforms across the board.

SYLVIE LANTAUME (AFP): If I may follow up on that, do you not think you will legitimise the lack of progress by going there?

MR BUITER: Not at all. We are not going there to give a seal of approval. We are not even going there to give a seal of disapproval. We are just going there to tell the Uzbek authorities, the central Asian countries and the world at large what works in economic development and transition and what does not, based on our 11 years of accumulated knowledge. We will make it very clear that key reforms, economic reforms, exchange rate unification, major modifications of textile procurement, paying domestic farmers something closer to world prices, depressed as they are already, for their crops, further economic reform of the financial system, and privatisation are all essential, and there will be no economic growth of any sustained type until these reforms are undertaken.

Uzbekistan is a country with enormous potential. It has, despite the weaknesses of the leadership in many dimensions, continued to emphasize and find the resources for education, so it has an extremely highly educated and skilled labour force. If these talented people are given the means through liberalisation and greater political openness to express themselves in the marketplace, they could transform the country in very short order. The benefits of reform are enormous, and the costs of not reforming are also enormous.

RAINER HELLMANN (EU Magazine): To come back to currency questions, did you find any differentiation in progress according to currency systems in eastern Europe? Were currency boards better than free float or did you find any evidence in this sphere?

MR BUITER: We have found, as you might expect, that very small and highly open countries, the most open countries financially, have gone as close to adopting the euro as they can without formally adopting it, having currency boards or a fixed peg. That makes sense because for these very small and highly open economies the benefits of exchange rate flexibility are negligible. The other countries are somewhat larger, though I think by most metrics they are still small and open, and so you find that the ability to let the currency depreciate or appreciate has some short-term economic management benefits which they are not yet ready or able to give up. Of course, those countries that are planning to run persistently large public sector deficits would be well advised to stick to a floating exchange rate regime, because while no exchange rate regime will give you happiness if you are not fiscally on the right path, it is certain that anything except floating will give you greater unhappiness. So going to a small, rigid exchange rate should only be considered by countries that are confident they can meet the fiscal challenge of managing their affairs without recourse to the domestic printing presses. You give that up, even as a currency board. The answer to the question about currency regimes is a fiscal one.

MR HIDAY: David?

DAVID CHANCE (Reuters): Can I just take you up on the question of currencies again? When the Czech Republic had the experience of massive in-flows last year, all they could do was slash interest rates, and try to engineer the crown lower. This year Hungary is facing the same problem, Poland possibly as well. We are going to see massive appreciation of currencies. Portfolio investors are on a free ride until accession. There are very few other investment choices, low-yielding instruments or extremely high-yield risk instruments, in other emerging markets. East Europe is a one-way bet for them, and it is going to cause problems for the central banks.

You have sat on a monetary policy committee of a central bank. If you were a central banker in any of the first-wave accession countries, what would you be trying to do to try and protect the competitiveness of your economy? Would you discourage these flows?

MR BUITER: No. Anyway, these countries are about to lose the ability to use administrative or exchange control measures to control any flows. Remember, part of the acquis, signed up to by all of them, is complete liberalisation of foreign exchange. Once you have that complete liberalisation of international financial transactions, the benefits, of course, of having your own currency are further diminished, because the volatility of the exchange rate as a result of short-term reversals of capital in-flows and out-flows can be bothersome.

The countries of the region - I would not say they pay the price for being successful, but success and the anticipation of continued success has consequences, not all of which are necessarily pleasant. If the Czech Republic looks an attractive proposition for FDI, and indeed for domestic investment, as apparently it does, we are going to have an investment boom in that country, and that means there will be upward pressure on domestic costs and prices and on competitiveness. Whether you do it through appreciation of the exchange rate or though the domestic inflation brought about by attempts to keep down the exchange rate and sterilising the resulting in-flows, you get the loss in competitiveness probably slightly more quickly when you do it through the exchange rate, but you will get it, and indeed, the responsiveness of domestic costs and prices to shock, both domestic and foreign, is rather greater in the accession countries than in the countries of western Europe and the United States, where there is much more nominal rigidity.

This is something that they have to manage. It is the price of success. You must, of course, be careful that your financial system is well supervised, well regulated, and that your banks and other financial institutions maintain balanced portfolios that can stand either large in-flows or out-flows or large variations in the exchange rate. That is a task for the regulator, the supervisor, not for the central bank, but it is a key task nevertheless.

The extent to which there are costs associated with these very rapid in-flows that we are seeing at the moment will depend in part on the degree of development and the strength and resilience of the domestic financial systems, and these have improved, as you can see in our indicators, but they still fall short in virtually all of the countries of typical standards in the most advanced industrial countries. So further reform is required. The transition is not over when the accession process has taken place.

ANDREZ SWIDLICKI (BBC World Service and Polish News Bulletin): Can I ask you what chance you see of fulfilment of the Maastricht criteria as far as fiscal policy is concerned in the near term?

MR BUITER: The answer differs from country to country. In each country it depends on the domestic ability to generate the political consensus in favour of the kind of budgetary policies that allow the criteria to be met. It is different for different countries. If you look at the budgetary pictures in chapter 3 of the accession countries, general government revenues and balances, page 61, you see that it varies quite a lot.

Lithuania has very small deficits. It already has a currency board with the euro. It is well within the Maastricht criteria both for the stock of debt and for the flow deficit. Incidentally, virtually all of our accession candidates in terms of the stock of debt are better situated than the existing EU members. On the deficit, on the flow side, some of them have some problems.

Slovenia, even though they do not have a currency board - they have a floating exchange rate - stays within the 3 per cent limit. So does Latvia, another fixer, and Estonia. So the countries that one would think would be the natural candidates for the earliest possible adoption of the euro are indeed, unsurprisingly, in the best condition to do so. They already have a fixed peg with the euro, and they have very low inflation, certainly within the safe range, and they have deficits they are permitted. If I look at the Czech Republic, which in 2002 is likely to achieve 9.3 per cent of GDP deficit, admittedly part of that is one-off or twice-off because of the recapitalisation of the banking system, but still the underlying picture is certainly some distance away from 3 per cent. Hungary, 6 per cent. Poland, 5 per cent. These countries, from a fiscal point of view, are clearly not in a position at this stage to meet the criteria. Whether they want to do so is a political choice that they will have to make, but if they decide to go for early membership, there would have to be either painful spending cuts or painful revenue increases, and that is a matter of arithmetic.

JEFF HIDAY: If there are no other questions, we can retire and have a sandwich or two, and ask any follow-up questions over sandwiches. Thanks for coming. Just to remind you, everything is under embargo until Sunday afternoon 2 pm, London time. Thanks for your cooperation on that point especially.