Looking forward, however, the possibility of tighter global liquidity conditions has raised investor redemption risk for hedge fund managers, particularly as the share of less liquid assets has reportedly been increasing. At the same time, correlations of returns within some hedge fund investment strategies and among strategies remained high or even increased, raising the risk of disorderly synchronous exists from similar trades in an environment of unexpected market turbulence. This is illustrated in the chart on the right on slide 13. 6. Overall assessment  Having reviewed the developments in the key parts of the financial system, I will now turn to the overall assessment of risks to euro area financial stability. Let me first remind you of the scope and the nature of our financial stability analysis. In particular, drawing attention to sources of risks and vulnerability to financial stability does not seek to identify the most probable outcome, but it rather entails highlighting potential and plausible sources of downside risks, even if the probability of their realisation is relatively low. Let me now conclude by stressing that in June 2006, the financial stability outlook rests upon a delicate balance. On the one hand, the global economic activity is expected to remain robust and the shock-absorption capacity of euro area financial institutions has improved. But, on the other hand, risks and vulnerabilities remain and some have grown further.
Certainly, the more flexible is your economy (in terms of public finances, the labour market, and so on), the easier it is to cope with shocks and the less monetary policy is needed. However, the case of the Eurozone shows how tricky it is when the absorber in the form of monetary policy is switched off and nothing replaces it. The shocks are bigger and hurt more. Listeners themselves can answer the question of whether the labour market and labour law are likely be made more or less flexible (and dismissals made easier) in the future. In doing so, they will answer the question of whether there will be a need in the future for more or less domestic monetary policy in the Czech Republic, a country whose conservative population is so averse to upswings and downswings. 1/3  BIS central bankers' speeches  The “convergence trilemma” The standard “monetary trilemma”, which you know very well (a country cannot simultaneously have a fixed exchange rate, an open capital account and autonomous monetary policy), is accompanied in a converging economy of our kind with something I call the “convergence trilemma”. No country can simultaneously have high convergence growth, a fixed exchange rate, and low macroeconomic imbalances, be they internal or external. In our case, catching up with our wealthier, low-inflation Western peers means a long-term tendency for our currency to appreciate. This is hardly consistent with a permanently fixed exchange rate.