As in Puerto Rico, the fiscal woes of many of our largest cities have been closely related to long-term economic transformations—essentially, changes in the industrial specialization that occurred in those particular places. In the case of New York City, the transformation was from manufacturing to services, and it took a generation to complete. The city’s management of that transition was far from perfect, and the fiscal crisis was the major manifestation of that failure. The institutions set up to respond to the crisis were crucial to ensuring that fiscal policy didn’t continue to amplify the problems associated with the economic transition. For a city to turn its circumstances around, it must navigate this economic transformation, identify what will define its comparative advantages going forward, and then build 2/4  BIS central bankers' speeches  anew around those sources of strength. The road to recovery A successful fiscal reform first requires a regime in which local officials recognize and accept the reality of the changing economic situation, and set spending budgets accordingly. This part is fairly straightforward, because it produces the simple policy dictum that borrowing—in all its forms—must be strictly limited. Of course, knowing what to do and actually getting it done are different things, especially when politics are involved. As a result, the record suggests that it can be extremely helpful to have some kind of independent fiscal monitor in place on an ongoing basis.
1  Nout Wellink, ‘The Role of National Central Banks within the Europeans System of Central Banks: The Example of De Nederlandsche Bank’, 30th Economics Conference, Oesterreichische Nationalbank, June 13 – 14, 2002. 2  BIS Review 46/2002  This would not, however, represent much of a change because already today the Bank has only limited autonomy in the conduct of monetary policy. As far as the transition to the euro is concerned, therefore, the path that Malta should follow seems fairly straightforward, given the starting point of the existing exchange rate regime. Today, the basket consists of the euro, the US dollar and sterling, with weights of around 52%, 26% and 22%, respectively. There is no fluctuation band. The peg is backed by official external reserves, which have comfortably exceeded the monetary base over the years and are equivalent to a fifth of broad money. The first step would be to increase the weight of the euro in the currency basket at the expense of either or both of the other component currencies. If the United Kingdom were to join EMU, this would automatically raise the proportion of the euro in the currency basket, making Maltese entry into ERM II that much easier. On accession, the timing for joining ERM II, as well as technical questions relating to the entry level and the fluctuation band will be up for discussion. If the Maltese lira were to join ERM II with the normal fluctuation band of ±15%, this would inject more flexibility into the system.