That is why I am convinced that our British friends are true allies when it comes to overcoming the current euro area problems, and that we can count on their help and cooperation – albeit from a different position than ours – for our initial steps regarding the Banking Union, including the steps towards single supervisory arrangements and the functions of the European Banking Authority. The United Kingdom has one of the world’s most sophisticated financial industries, and a wealth of regulatory and supervisory intelligence and experience. Quite frankly, we wish to avail ourselves of their help and advice. The current economic situation is not an easy one in either the United Kingdom or Spain. There are serious imbalances in our public finances and problems in our banking systems, but unemployment is much more severe in Spain than in the United Kingdom and, moreover, we are suffering from a bout of distrust regarding the future of the euro area, which affects our external financing, but naturally not the United Kingdom’s. What is more, the restrictions on the European Central Bank differ from those to which the Bank of England is subject. Finally, we should note that the latest news on economic activity in the United Kingdom appears to be positive, and that in Spain we are implementing a very harsh adjustment that is already yielding appreciable results in terms of fiscal consolidation, competitiveness and correction of the current account deficit.
What is more, the world economy is still characterised by profound imbalances, such as the deficit in US external accounts and the lack of flexibility in the Chinese monetary system. Turning now to monetary policy, there were often considerable disparities in 2005, for instance, the progressive hikes in the rate of interest in the United States at a time when monetary policy in Europe was characterised by a waiting-game approach. Despite these potentially destabilising factors, financial markets remained relatively calm. In currency markets, the dollar picked up in the wake of tighter US monetary policy, while the yen moved only slightly against the Swiss franc. The exchange rate of the euro against the Swiss franc fluctuated within a narrow range, thereby reflecting the strong convergence of fundamentals in Switzerland and the euro area. Over the past few months, the Swiss franc has even trended downward – a decline that is hard to explain given the low rate of Swiss inflation as compared to the rest of Europe. If this trend  2  BIS Review 34/2006  were to accelerate and give rise to an excessive relaxation in monetary conditions with respect to economic developments, a normalisation of interest rates would become even more essential. Generally speaking, the capacity of financial markets to absorb shocks and to cope with imbalances is one result of globalisation and the progress in financial intermediation. In addition to stimulating goods markets, globalisation has also enlarged and deepened financial markets, and is doing so to a growing extent.