But we know today that the first decade of the single monetary policy coincided with a period of excess liquidity and credit worldwide, widespread underestimation of risk and generalised laxity on the part of the regulatory authorities, who trusted financial markets and intermediaries to regulate themselves, which proved to be a very serious error. In this climate, the financial markets did not exert effective discipline on economies that ran up excessive debts, and whose borrowers benefited from risk premia similar to those enjoyed by other economies with more sustainable debt growth. Yet neither the lack of economic policy responses, lax regulation nor the inoperativeness of the automatic adjustment mechanisms suffice to explain the virulence of the crisis, and much less so the systemic dimension it has acquired in recent months, in which the problems have spread to euro area countries with sound economic fundamentals. At present everybody accepts that the slowness in resolving the crisis, and indeed the worsening of the crisis, is also due to the fact that the institutional arrangements for Economic and Monetary Union lacked suitable instruments to identify, prevent and, where necessary, force through the correction of the imbalances that might arise in the Member States’ economies. Concern over the destabilising force of the fiscal imbalances within EMU led the Maastricht Treaty to envisage a formal budgetary discipline surveillance procedure, the Stability and Growth Pact, with ceilings or benchmark levels for budget deficits and public debt which, as we have seen, have proven absolutely insufficient.
But of course don’t expect a central banker to answer this question, one year in advance. I will just mention the Banque de France view on the rationale that should be behind the determination of the starting level of the euro area short-term rates. As you know, we currently observe interest rate differentials between the “core” and more “peripheral” currencies participating in the exchange rate mechanism. Although these spreads have been dramatically reduced in the past two years, due to the remarkable convergence of inflation rates throughout the European Union, some interest rate differentials still exist. They can be attributed partly to differing positions in the business cycle, and partly to differences in credibility. Cyclical differences within the potential euro area should not be overestimated. There is, all in all, a relatively high degree of synchronisation in the business cycle in continental Europe. The convergence criteria laid down in the Maastricht Treaty certainly played an important role in fostering this synchronisation. Moreover, in the future, differences in cyclical developments will gradually be reduced as policies, structures and behaviour will become more and more similar. Lastly, some persisting differences may well be tolerated as is currently the case between the various regions of the same country or, for instance, between the various member states of the USA. Credibility differences between “core” and “peripheral” currencies result from the different lengths of the track records in terms of stability-oriented policies.