However, in addition to imperfect rules and policy actions, the crisis has revealed a series of institutional deficiencies which need to be eliminated in order to restore economic and financial stability. The clearest example in this regard is probably the European institutional framework. Over the last three years we have witnessed how the perception of country risks has climbed to very high levels as a consequence of both sovereign credit risk as well as the so-called redenomination risk. This development has impeded the adequate functioning of monetary union by leading to sizeable differences in the financing conditions for agents located in different States within the monetary union and by instigating the renationalisation of financial markets. There can be no doubt that much of what has happened is directly linked to the significant macroeconomic and financial imbalances accumulated by several euro area countries, as well as to the emergence of vulnerabilities within the financial sector. It is also clear that the main remedy for those destabilising developments lies in effective adjustment of domestic policies, which is currently being implemented in those countries suffering the most significant stress. But, at the same time, the elimination of any perception of redenomination risks can only be fully accomplished if – in addition to the required domestic policy action – the central bank is fully and credibly committed to intervening in sovereign markets as far as is necessary to avoid the pricing of sovereign risk becoming self-fulfilling.
So, what about the question I raised earlier on about whether the two financial systems of the country have a working relationship that maximises the mutual benefits of the two jurisdictions and therefore is in the best interests of the country? If you want an honest answer from me, it would I am afraid not be one in the affirmative. There seems to me considerable scope for a co-operative, complementary and interactive working relationship between the two financial systems, in which, as I said earlier, relative strengths are exploited and relative weaknesses addressed, and synergies maximised. The further question then is how such a working relationship should best, and realistically, be developed. It is quite natural to think that developing such a relationship between the two financial systems could be left to the market. While this is theoretically possible, it assumes that market forces are allowed to work freely across the two financial systems, which is not always the case. In merchandise trade, this is by and large true, and as a result the two economic systems specialise in areas in which they have respectively comparative advantage in producing. But in the provision of different services, as in the case of financial services, there are restrictions limiting the working of market forces, for example, restrictions on access of service providers to the other system and restrictions on the mobility of the user of services across the two systems.