I would like to briefly recall why the Stability and Growth Pact plays such an important role: •  By supervising the fiscal policies of the euro area Member States, the Pact together with the Broad Economic Policy Guidelines contributes to ensuring an appropriate policy mix within the euro area. It is essential for conducting a meaningful monetary policy, to counterbalance the fact that Europe does not have a significant federal budget. •  By setting up a penalty system for excessive deficits, the Pact also helps prevent well-managed economies from having to bear an unjustified risk premium which would be transferred from poorly managed economies to them through the channel of the single currency. As regards the second common criticism against EMU, that is to say the lack of instruments to respond to asymmetric shocks, I would like to stress that the Stability and Growth Pact helps countering this argument. Indeed, by urging countries to aim at a fiscal position “close to balance or in surplus” in the medium term, the Pact enables them to let fiscal deficits increase, if need be, providing that they do not exceed the 3% reference value. In short, it allows them to create a fiscal buffer during normal economic periods, that can be drawn on to counter economic divergences or asymmetric shocks. The last set of criticisms focuses on presumed economic divergences between economies within the euro area.
4  BIS Review 11/2003  EMU fosters economic and financial integration Financial Europe under construction: the reorganisation of capital markets In 1999, as soon as the euro was launched, one of the expected advantages was the prospect of deeper, larger and more integrated capital markets contributing to reducing the cost of capital for businesses and giving Europeans a greater range of saving options. These expectations have become reality in both the money market and longer-term capital markets. On the euro money market, the unsecured deposit inter-bank market is highly integrated. EONIA and EURIBOR have provided the market with uniform benchmarks that are fully accepted by all market participants. This is reflected, for instance, in the huge development of the euro interest-rate swap market. On the euro bond market, the integration process has registered three main developments: •  a rapid internationalisation: The introduction of the single currency has fostered the euro-denominated private bond market, by enlarging the potential pool of investors, notably international investors. •  increased competition between issuers, which has encouraged the standardisation of sovereign bonds, the gradual convergence towards “best practices”, the development of a range of attractive and actively traded benchmark issues (especially for sovereign bonds). Besides, competition has also enhanced liquidity as issuers have increased the average size of outstanding bonds.