Just after 9pm that evening, we received an email from the Federal Reserve: could the dollar swap line central banks speak the following morning? The dollar swap lines may be the most important part of the international financial stability safety net that few have ever heard of. Global trade and investment relies on the dollar. In normal times, firms and local banks located outside the United States can easily secure these dollars using FX swaps, provided by international banks with access to US markets, to exchange their local currency for dollars. In times of turbulence, however, these markets can become impaired, or even seize up altogether, as the international banks batten down the hatches. Trading firms who cannot secure dollars will either have to cease trading altogether, or try to raise dollars in other ways, for example by liquidating dollar-denominated assets. That selling pressure, if allowed to take hold, could trigger, or amplify, global financial instability. 4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  That Monday night, the first signs of such stress were starting to emerge: the dash for cash had reached FX markets. Falling asset prices and rising panic about the outlook were boosting offshore dollar demand. But international banks’ capacity (and willingness) to meet this demand was becoming impaired – raising the cost of local dollar funding relative to that available to onshore US firms. That divergence was particularly marked in Japan (green line in Chart 3).
This is understandable, given that many of them have already made progress towards adopting the euro. But we have also heard clear words of caution. Let me take the opportunity to emphasise that the euro area is not a closed shop. Following three enlargement rounds since the start of monetary union in January 1999, and with Slovakia joining the euro area as its 16th member on 1 January 2009, there is no reason to believe that the door might one day be closed. But there is no shortcut. In fact, the difficulties that some countries face today are related to their failures to adjust, failures that go back a long way. As a result, domestic and external imbalances have emerged, with adverse effects on the sustainability of the catching-up processes in those countries. The fast introduction of the euro would not resolve the underlying problems – but could weaken EMU. Structural adjustments as well as nominal and real convergence are therefore needed prior to the adoption of the euro. This means that the countries concerned must achieve a sustainable level of nominal convergence at high standards in terms of meeting the convergence criteria. The adoption of the euro without adjustment is not possible. To regard entry into EMU as an easy way to solve or circumvent the current challenges surrounding the catching-up processes would be wrong. And a premature entry might aggravate current problems and put the credibility of EMU at risk.