The independent Banque de France has over the last six years shown great determination in helping to ensure that the euro inherited as much confidence as possible at its birth. This legacy of confidence is in good hands. Fiscal policy In the field of European fiscal policy, the Monetary Policy Council draws attention to the following three points. –  First, it remains essential that the mutual surveillance by euro area governments of national fiscal policies, within the framework of strict compliance with the Stability and Growth Pact, function smoothly. The European Union does not have a significant federal budget for economic policy— the European budget only represents 1.27% of Union GDP. Therefore, all the national budgets of the Member States combined function as the Union’ s budget. The preservation of confidence in the euro, and consequently the prosperity, growth and creation of jobs in the euro area, will depend on the quality of fiscal surveillance throughout the area. –  Second, by adopting the Stability and Growth Pact each individual European country, and not just the European Union, set itself the medium-term objective of achieving public finances “close to balance or in surplus”. The Monetary Policy Council emphasizes this point, which is essential for the stability of the single currency and is necessary to favour growth, job creation and the fight against unemployment. One of the difficulties encountered by Europe, as by France, is that public opinion is not yet entirely convinced.
They cut back spending 16  more sharply as incomes and house prices fall, amplifying any downturn ; 17  Distressed sales of homes drive house prices down ; 18  Reliance on foreign capital inflows can expose the economy to global risks ; 19  And credit booms overseas can translate to crises at home . All of this economic analysis would still not have told us what would happen in 2007. It would not have allowed us to predict the roll of the economic dice. But it would have revealed that a bad roll would have very serious consequences. The financial system could have been stress tested against that. Its resilience could have been reinforced. It could have been prepared. What became a disaster could have been contained to a downturn. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  Now, with my second principle ringing in our ears, the toughness of our stress scenarios reacts not to whether a downturn is likely to unfold but to how deep it could be if it did. So when all appears bright – as real estate prices rise, credit flows, foreign capital inflows increase, and the last thing on people’s minds is a downturn – our stress scenarios get tougher. And my first call to arms for academia this evening is for further research into indicators that can help to guide us in asking how bad it could be.