This misperception might lead to inappropriate policy decisions. Unlike in previous crises, one difference on this occasion and in the years ahead is that the euro area countries will not be able to use the exchange rate as a policy instrument. This fact seems to excite many commentators. Some believe it will create further tensions within the euro area, and may lead to a split-up. Other observers, on the opposite, foresee a strengthening of other policy instruments to face up to the challenges. I won’t respond to such speculation, but will make a few points for you to consider. First, one reason for creating the euro was to avoid precisely the kind of turbulence that occurred in Europe when we had a large number of currencies with adjustable exchange rates. There is no doubt that the effects of the crisis would have been greater if the euro area members still had their own currencies. This is the lesson from the upheaval of 1992-93, which is fully understood today. To use Chancellor Merkel’s words: “One of the lessons of this financial crisis is that, if we hadn’t had the euro, we would have had to invent it”. Second, the current crisis is bound to raise again the issue of whether a single market like the one we have among 27 countries in the EU can function smoothly when the exchange rate of some of the members is allowed – or even encouraged – to depreciate sharply, possibly distorting competition.
As a result, country-specific factors have become less important in determining corporate bond prices and spreads. Cross-border holdings of long-term debt securities of monetary financial institutions grew from about 15% in 1999 to nearly 40% in 2007. Integration in the equity markets is less advanced but shows signs of improvement. Between 1997 and 2006, euro area investors doubled their holdings of equity issued in other euro area countries to 29% of their total portfolio of euro area equity assets. The retail banking segment has remained more fragmented. In particular, the euro area cross-country dispersion of bank interest rates, especially of interest rates on consumer loans, has remained relatively high. This reflects different conditions in national economies (e.g. credit and interest rate risk, size of firms, industrial structure and degree of capital market development), institutional factors (e.g. taxation, regulation, supervision and  2  BIS Review 20/2009  consumer protection) and financial structures (e.g. degree of bank/capital market financing and competitiveness). It was probably overoptimistic to expect a faster convergence in this segment. The creation of the euro also gave rise to expectations of a broad based convergence of underlying economic developments. These expectations were quite varied, in fact. Some people expected greater divergence as a consequence of specialisation. Others expected greater convergence. The result is mixed. Some convergence has been observed, in particular in terms of business cycle and dispersion across countries, which is comparable with that among the US states.