Policy makers were looking to trade finance as a major channel. However, contagion takes time and cannot fully account for the exceptional synchronisation in the drop in output. With hindsight, the phenomenon may best be seen as a global liquidity shock. Net supply of liquidity dried up at the same time everywhere in the world. International banks faced a sudden and ample shortage of dollars. Firms started to hoard liquidity. Investment and, in part, production, came abruptly to a halt. When such a shock occurs, public provision of liquidity has to replace private provision. In a domestic context, this is the function of the lender of last resort. But when there is a shortage of foreign currency liquidity, this role has to be played by foreign exchange reserves. Following the 1997–98 crisis, emerging countries constantly sought to expand their foreign exchange reserves. The average reserve ratio of emerging markets has more than quintupled from 4 percent to over 20 percent of GDP since 1990. One cannot assume, however, that equilibrium has been reached and that the demand for reserves will stabilise. On the contrary, there are strong indications that this trend will persist, or even be amplified, following the crisis. This may be seen as undesirable but also unavoidable in the current financial architecture. No amount of reserves will fully protect a financially open economy against a systemic shock.
I would like to draw your attention to the following issues: í  first, the euro area will have to face up a number of challenges to confirm its initial success;  í  second, the success of the euro will make a contribution towards encouraging a balanced international monetary situation. I believe that in the current overall economic situation, the success of the euro will help not only Europe but also the rest of the world which will benefit from European prosperity and growth as part of a healthy world economy. This would help facilitate the current accounts adjustments of the countries affected by the crisis. The success of the euro will be complete if a number of challenges are taken up A few years ago, it was necessary to convince a great deal of sceptic people that the euro was a viable project. Many of them pointed to its presumed contradictions and its alleged inconsistencies: for example, the impossibility of achieving an efficient policy mix without a political federation; the impossibility of avoiding some “asymmetric shocks”; the lack of sufficient flexibility of the economy and real mobility of the labour force in the European countries, etc. The result was that the euro would never exist! BIS Review 81/1999  4  These criticisms proved wrong as to the introduction of the euro. But they are useful to help answer the question of what are the conditions for ensuring that the euro is a complete success.