The risk may arise from differences in fiscal positions even though these are to be constrained through the Stability Pact. Or it may result from economic shocks of some sort that have a bigger impact on some countries than on others. The rise in oil prices in the early 1970s or German reunification are classic examples. BIS Review 23/1998  -2So the risk of divergent monetary policy needs within the euro area is real. And the damage it could cause if serious tensions between member countries were to emerge is substantial, because alternative adjustment mechanisms, such as labour migration or fiscal redistribution, that exist within individual countries, and which help to alleviate the similar regional tensions that arise at the national level, are not well-developed at the pan-European level. The Maastricht Treaty, of course, recognised this risk, and the famous convergence criteria were designed precisely as a means of reducing the risk to manageable proportions by requiring that, before they join the euro club, countries should have achieved at least a minimum degree of macro-economic convergence - demonstrating their commitment to macro-economic discipline through both fiscal consolidation and monetary policy directed at effective price, and exchange rate, stability. And there is no doubt that all European Union member states have made huge progress towards macro-economic stability over the past few years. The betting in financial markets is therefore that when, in early May, the Heads of State come to make their decision, a broadly based euro will indeed go ahead.
Valuations lead lending by around a year, with a correlation coefficient of around 0.75. 2  BIS central bankers’ speeches  One way of slowing that pro-cyclical spiral would be to base lending decisions not on spot, but on medium-term or sustainable valuations. Any ramping-up of property prices above their sustainable value would not then automatically give the appearance of safety and thereby encourage looser credit conditions. That, in a nutshell, is the aim of the recommendation in the “Vision” document. Needless to say, there is further work to be done by the industry to make these proposals operational. The very first minutes of the Forum highlighted property statistics and valuations as two areas where greatest improvement was needed. Twenty years on, that remains the case today. A continued effort will be needed by the industry to complete the job. Next, regulators. For much of the period prior to the financial crisis, credit and asset price cycles were only of interest to policymakers to the extent they posed a direct risk to inflation targets or to the solvency of individual firms. Were a bubble to blow, then the most likely response was a combination of benign neglect on the upswing and lower interest rates in the downswing. The role of policy was to “mop” after the flood. That orthodoxy has been sunk by the crisis. After perhaps the largest credit boom in human history, central banks globally are still frantically mopping with unprecedented degrees of monetary stimulus.