This was Sweden’s experience with the combination of a currency peg and deteriorating public finances in 1991-1992. But now there is another danger. Given that the target of imminent euro adoption is gone, and the large euro area nations do not provide real leadership on fiscal soundness, there is less incentive for some of the new member states to stick to the consolidation of their public finances. This is especially obvious for Hungary, where the deficit was 7.5 per cent in 2005 and is, according to present plans, expected to increase to around 10% this year. For Poland and the Czech Republic the deficits will stay at the present level of around 3% in the coming two years. Whether in the old or new member states, there is an additional problem, as we are entering a period of intensifying structural changes. Old industrial patterns in Europe are being changed when confronted with both the boost to productivity from IT and globalisation and enlargement, all of which supports this process. These trends will eventually help productivity and growth in Europe to start catching up with the US again. But in the short term the structural changes will lead to higher frictional unemployment as old industries are more rapidly replaced by new ones. In addition, the recent downturn never led to a dramatic increase in unemployment or a dramatic decrease in employment in the euro area; hence, the upturn is probably also less likely to lead to rapid job creation.
Where we draw the line within that for being in scope of this initial first step of the strong and simple framework will impact the extent of simplification we can achieve while maintaining strong standards. There is also the risk that simplifying requirements for smaller firms could increase barriers to growth, if the step up to the next level of our framework is too big. That being said, we could in the long run move to a graduated approach that covers all nonsystemic firms. Under such a regime the complexity of the framework would grow 2/5  BIS central bankers' speeches  commensurately with the size and complexity of a firm’s activities, minimising potentially steep barriers to growth. This is in fact the long-term vision we have outlined in our paper. But doing this will take time and, rather than delaying the roll-out of a simpler framework for everyone, we thought a better approach would be to do this step-by-step. One possible first step is to start with the smallest firms that would benefit the most from a radically simpler regime – but, as with all the trade-offs in our paper, this is something we would welcome views on. We also need to consider the position of foreign banks that operate in the UK. Internationally active firms will continue to be in scope of international standards; likewise, it may be appropriate for subsidiaries of international groups to stick with the international standards. But we have an open mind on this.