But, meanwhile, investors are putting their money where this unusual phenomenon is allowed, by structural flexibility, to be manifested in full force, notably in the United States. This is seen to be a factor contributing to the strengthening of the dollar and the weakening of the euro, and reinforcing the scepticism about the euro. One thing that we have learned from the Asian financial turmoil is that global financial markets, made highly efficient by financial liberalisation and the advance of information technology, have become rather intolerant about policy mistakes. Strengths as well as weaknesses are magnified in financial market behaviour to a disproportionate degree as a result of the explosion of international finance. What until recently were considered to be small aberrations in policy can now be brutally punished by the market. Even those who have been particularly prudent can be tossed around rudely, as market sentiment sways and, occasionally, succumbs to manipulative forces. So far, the emerging markets have been the ones affected, overwhelmed by international finance, perhaps to an unjustifiable degree relative to their economic fundamentals. Although they found the situation difficult to cope with at the time, most of them pulled through and are now recovering strongly. The one common quality that they possess, which is responsible for this rapid turn-around, is structural flexibility. The explosion of international finance is poised to continue, after the current lull, and will be made even more potent by further advances in information technology.
Euroland is, of course, much bigger and more sophisticated than the emerging markets in Asia, and so the risk of Euroland being similarly overwhelmed by international finance is distinctly lower. But, seen from Asia, even for the large and sophisticated markets, the risk is not so low that it can be safely ignored. And if problems materialise, structural rigidities that inhibit adjustment may exacerbate and prolong the pain and disruption. I sense also that there are still doubts about whether Euroland will cope well with the discipline of adjustment imposed upon it by currency union and therefore be able to realise fully the potential of such a union. Let me draw your attention to an interesting and highly significant parallel between your system of a unified currency across eleven countries and Hong Kong’s currency board system fixed to the US dollar. We both depend to a very much greater degree than would otherwise be the case on internal market flexibility as a mechanism of economic adjustment. As you are aware, Hong Kong has always enjoyed a reputation as a flexible economy. It is precisely that flexibility in the labour, property and other markets that has ensured the sustainability of Hong Kong’s high rate of economic growth and currency stability over the nearly seventeen-year history of our currency board system. It is that flexibility, involving sizable and quite swift price adjustments, accompanied by a considerable degree of labour mobility within and between sectors, that has enabled Hong Kong to cope with economic shocks.