Although some consolidation has been overdue in these asset markets which had overshot as a result of irrational exuberance, when they do fall sharply our exchange rate link with the US dollar inevitably would be blamed as the culprit, at least when everybody was in the heat of it all. 27. Thankfully, it is perhaps in the nature of human beings that even the innocent parties who were unfairly hurt are capable of appreciating the big picture and rationally assessing what the alternative might be. Interest rate volatility is the price to pay for a stable exchange rate. Clearly it would not be in their interest for Hong Kong to get involved in the process of competitive devaluation of others in the region and suffer even higher interest rates. And why should we, given that our competitive position, as very much a service oriented economy, is not really very sensitive to exchange rate changes? The currencies of the Asian economies, other than the Mainland of China, have recently been on a free fall. I am sure even the International Monetary Fund (IMF) is surprised by the extent of the devaluation seen in the Asian currencies after they were floated. 28. All concerned might have underestimated the effect of a general realization of the need for hedging when a currency moves from a fixed exchange rate system into a floating exchange rate system. It has now become quite clear that there has been overshooting in the depreciation of some of the Asian currencies.
For fiscal policies, which continue to be largely a national responsibility, the Treaty sets out a framework of surveillance and disciplining mechanisms in order to maintain sound public finances. These indispensable cornerstones of the institutional framework agreed in Maastricht have been confirmed by the Constitution recently signed by the Heads of State and Government in Rome. The Stability and Growth Pact, which was agreed by all governments in 1997 after the signing of the Maastricht Treaty but before the launch of the single currency, sought to provide additional incentives for maintaining fiscal discipline at the national level by operationalising the excessive deficit procedure of the Treaty. It also specifies a commitment to achieving medium-term budgetary positions “close to balance or in surplus” and incorporates multilateral surveillance procedures and the exchange of information in conjunction with medium-term stability programmes submitted by national governments. Assigning the overriding objective of price stability to the single monetary policy is an example of the benefits of a clear division of responsibilities between different policy actors. The delegation of the single monetary policy to an independent central bank enhances credibility, increases transparency and also facilitates accountability. Similarly, the Stability and Growth Pact provides a basic set of rules for the conduct of sound and disciplined fiscal policies by national governments, while in principle preserving sufficient room for manoeuvre for the operation of automatic stabilisers without infringing the 3% ceiling for the deficit-to-GDP ratio.