If I were going through what many of you are now going through in your individual businesses, I think I would find the prospect of exchange rate certainty overwhelmingly attractive - given of course a reasonable starting point. The potential downside, from a macro-economic standpoint, is that just as now directing monetary policy to lowering the exchange rate would mean losing control over domestic demand, so too, as a member of the euro area we might find that the single euro interest rate was not necessarily appropriate to our domestic situation. We would certainly be facing a build-up of excess BIS Review 3/1998  -4-  demand, and inflationary pressure, now, for example, if we were constrained to German-level interest rates. At other times interest rates that were appropriate in Europe as a whole could impose unnecessary stagnation and rising unemployment in this country. Serious divergence of this kind between the domestic monetary policy needs within the euro-area is not, of course, inevitable. But, if it is to be avoided it is important that the economies of the euro-member countries should have shown at least a minimum degree of sustainable convergence - before the project goes ahead. That was recognised very clearly in the famous convergence criteria written into the Maastricht Treaty. Assessing the extent to which sustainable convergence has in fact been achieved is the unenviable task facing the European Finance Ministers and Heads of Government at their historic meeting at the beginning of May.
As regards fiscal policy, the discussion in the G7 should not just be about increasing spending, it should also be about improving the quality of the budget. The ECB agrees with the idea that “countries that have fiscal space should use it”, but many countries do not have this fiscal space. Reducing unproductive expenditures and cutting taxes or increasing  BIS central bankers’ speeches  1  investment in productive infrastructure, such as education and research, can lead to growth without increasing the deficit. What about foreign exchange policy? The UK pound and Japanese yen have been increasing and volatility is very high. What will the G7 do to reduce volatility? The G20 countries have committed not to use the exchange rate for competitive purposes, as confirmed in recent meetings in Shanghai and Washington. All of us should act in a way consistent with this commitment and which does not add to global uncertainty. Emerging markets are slowing down and advanced countries have very low growth rates. What should the G7 and advanced countries do for the world economy? In a low-growth environment globally, there might be a temptation for some countries to grow at the expense of other partner countries. So it is precisely the role of the G7 or the G20 to resist such temptation. There is no “magic bullet” for increasing growth. For the G7, it is crucial to send the message to support domestic demand and focus on those structural policies that will be most conducive to growth.