At present, this ratio exceeds 100 percent in all these three cases. The trend has been also growing fast in Greece, albeit from a lower base. In Portugal, for instance, domestic banks took the opportunity to issue eurodenominated bonds in euro area markets to increase rapidly the volume of domestic loans both to the corporate sector and to households. Capital inflows through banks financed a mounting current account deficit. It also fuelled fast growth of domestic demand and GDP in 1998-2000. This experience could in principle be viewed as a manifestation of the expected potential benefits of monetary integration. In fact, it has been argued that euro area membership has enabled the participating countries to overcome the famous Feldstein-Horioka puzzle, i.e. the traditional strong link between domestic savings and investment. In other words, the current account constraint may become non-binding after euro adoption, which should lead to a more efficient allocation of capital in the long run. However, it might be also questioned whether such a fast credit expansion will lead to a build-up of vulnerabilities in the balance sheets of financial institutions, firms or households. In the case of Portugal, for example, the debt burden of the household sector has exceeded 100 percent of yearly disposable income, even though a decade ago this ratio was comparable to the current situation of some acceding countries. As a result, one can think of adverse scenarios in which the repayment capacities of the banks’ clients would deteriorate substantially, with adverse consequences for financial stability.

This need for “consistent application” brings me on to the much harder condition for success – the “condition of mutual trust”. We have a globally integrated financial sector. But we have national – and I should note in Europe’s case, regional – regulation and supervision that answers to national parliaments and, when it goes wrong, drags in national taxpayers. Internationally we can only agree standards. We cannot implement them in international law, in international regulations. That can only be done by national legislators in national law. Nor, when we have implemented the rules, do we have international supervisors to apply them to international firms. We have only national supervisors, answerable to national parliaments. Without mutual trust between national authorities, without a willingness to recognise each other’s implementation of internationally agreed standards, we put at risk the success we have achieved so far in developing the “governance” of the international financial sector. The risk comes from two directions. From one side, there will be pressure for a race to the bottom. If there is inconsistent application and lack of trust regulators and supervisors in each jurisdiction will come under pressure from the firms they regulate to ease up. Firms will argue that other jurisdictions are not implementing properly and that their competitors in those jurisdictions are getting a favourable ride. The pressure will be to weaken implementation everywhere ending with a race to the bottom. This is not theory. It is one of the most important lessons of the pre-crisis period.