On top of the difficulties with implementing first best policies, policymakers may feel compelled to act fast because past experience has led them to be wary of surges in capital inflows. History has taught us that these inflows have a tendency to end in sudden stops and sharp currency depreciations that for some countries may result in recessions and crises. In the session of tomorrow morning, the presentations by Jaume Ventura and Sebnem Kalemli‐ Ozcan will address some of the potential consequences of the capital inflows to financially‐ integrated emerging economies: the appearance of asset price bubbles and the transmission of foreign shocks. These concerns have led several countries inside and outside Latin America to implement interventions in the forex market, capital‐account‐management and macroprudential policies to reduce the financial vulnerabilities that may arise from real exchange rate misalignments, fast credit growth, maturity or currency mismatches, and housing price increases. These types of policies have been more prevalent among emerging markets. But they have also been implemented by developed countries. For instance, Switzerland has actively intervened to maintain the value of the Swiss franc relative to the Euro, and South Korea has  2  For example, Forbes and Warnock (2012) indicate that global factors were the most important drivers of capital flows to emerging markets, especially debt flows. Fratzscher (2012) uses an event study methodology to show that QE announcements had an effect on equity and debt flows to emerging economies. 3  See Bianchi (2011), Korinek (2011), Dell’Ariccia et al. (2013), among others.

In particular, there has been much greater cross-border activity in Europe, supported by fully-integrated pan-European systems for making wholesale payments. But many systems for the trading, clearing and settlement of securities are still fragmented nationally by sector. Market firms are keen to see consolidation of the arrangements for clearing and settling securities trades, where costs are still considerably greater in Europe than in the US. Even without mergers, market firms can of course trade remotely from a single location, though this does not address the issue of duplicate investment costs. But it seems that full rationalisation may take years to implement and, while the broad vision of integrated European systems is widely shared, there are still differences of view about how best to achieve it. The third change is the diversification of investment. The launch of the euro has begun to encourage a shift in funds away from the particular national market in which they have traditionally been invested, and towards investment across the euro area as a whole. This helps to explain the increasing use by fund managers of European benchmark indices against which to measure investment performance, rather than national benchmark indices. Portfolio diversification has so far been rather slower than originally expected. But there is evidence that diversification is continuing to take place, and it is expected to pick up over time. Fourth, financial institutions themselves are consolidating, including in some cases across borders, so that they can better provide a service to clients across the Single European Market as a whole.