Indeed, it was Carlos Diaz-Alejandro, by the mideighties, who eloquently said “good-bye financial repression, hello financial crash” (DiazAlejandro, 1985). Some recent research also points in the same direction, as reviewed in Dr. Reddy’s lecture – beyond a certain level, financial depth has marginal contributions to growth (Arcand et al., 2012; Cecchetti and Kharroubi, 2012). In Chile we had a great financial crisis in the early eighties which led to an overhaul of financial regulation. The country followed the prudent route, allowing only activities that could be handled appropriately by financial intermediaries, but above all that could be understood  1  and monitored well by market participants and financial regulators. Since the country was emerging from a deep financial crisis, the macro view of the financial system and its regulation were a central part of the design. But this seems not to have been the case in advanced economies. The global financial crisis has revealed the perils of financial deepening. It has shown that advanced economies are not different. This is not new in emerging markets, but is something less common and more dramatic in advanced economies. Long ago we learned that when an economic downturn comes with a financial crisis the costs are extremely high. What went wrong? It is important to recall that the crisis had its origins in a noble cause: providing housing to low-income families.
Exchange rate certainty within Europe - even though it is nominal certainty rather than real exchange rate certainty - would potentially enhance the benefits to be derived from the European Single Market. The euro’s second very powerful advantage is the possibility it opens up for much broader and more liquid financial markets. It will mean a progressive narrowing of spreads between borrowers and lenders - and that will be good news too for financial intermediaries as a group, because it will lead to higher volumes of financial activity - though not every individual intermediary will benefit, of course, in the more competitive environment. The City of London is already making an important contribution to this process of financial euro-market integration. So there are potentially powerful advantages. What then are the risks - the possible arguments against our joining the euro? Essentially the potential downside can be summed up as the risk that the single - one-size-fits-all – short-term interest rate within the Eurozone - which is the inevitable consequence of a single currency - will not in the event prove to be appropriate to the domestic monetary policy needs of all the participating countries. Countries may have divergent cyclical positions. They may face divergent fiscal positions which would affect their appropriate fiscal/monetary policy mix in different directions - though this should be contained by the Growth and Stability pact.