Another argument supporting better functioning labour and product markets is that the monetary policy of the Eurosystem is and can only be geared to the euro area as a whole. It can thus not take into account purely national or regional developments. The cyclical positions of participating countries have not yet completely converged, although – with the single currency in place – some national differences may disappear over time. This requires national policies and labour and good markets to be increasingly flexible in order to be able to respond effectively to economic shocks that can affect any monetary union. A single currency does not call for uniform wage developments or for uniform economic and social policies in general. On the contrary, where national or regional economic and productivity developments are different, this should be reflected in different policy responses and wage developments. BIS Review 116/1999  2  Budgetary policies, too, are crucial for setting the necessary conditions conducive to growth and employment creation. Sound public finances, with lower public debt and tax burdens, contribute to a reduction of long-term interest rates, reduce uncertainty and increase private capital formation. Thus, they not only facilitate the task of monetary policy to maintain price stability, but also strengthen the conditions for sustainable growth conducive to employment creation. Conversely, unsound fiscal policies tend to increase inflation expectations and force monetary policy to keep short-term interest rates higher than would otherwise be necessary.

These arrangements will enable the Eurosystem and the ECB to participate fully in international cooperation. This is all the more important since the international agenda contains important items for the future. The generally improved outlook for the world economy should not lead to complacency and to a diminishing of the reform efforts initiated in the aftermath of the financial crises of the past two years. Strengthening the architecture of the international financial system remains an important topic on the international agenda. The financial crises in Asia, Russia and Brazil, with risks of contagion to other emerging market economies and spill-over effects into capital markets of matured economies (e.g. LTCM in the United States), highlighted the need substantially to improve the ability to prevent and resolve crises. Against this background, a wide range of proposals was put forward and reviewed. One important aspect concerns the strengthening of the soundness of the banking systems and of regulatory and supervisory frameworks in emerging market economies. Another reform initiative relates to the transparency of the private and public sectors. The main objective here is to improve available information through the elaboration of international standards and codes of good practices. Further progress in that area will contribute significantly to crisis prevention, since improved information will enable a better risk assessment by market participants. The challenge now is to keep the political momentum for reform and to pursue the implementation of the envisaged measures in order to strengthen the resilience of the international financial system.