Certain kinds of unconventional monetary policy actions in specific environments could be ruled out of order because of the large adverse spillovers they create—much as sustained one-directional intervention in the exchange rate was frowned on until recently. In this view, adhering to such rules would not be a matter of altruism. Countries that have signed the IMF Articles of Agreement already accept responsibility for the international consequences of their actions. 27 The impact on EME growth combines estimated higher volatility, derived from the Capital Flows-at-Risk model in the face of increasing sensitivity of capital flows to global factors, with the historical relationship between growth and volatility shown in Chart 2. The spillback to advanced economies is consistent with estimates in the following paragraph for the US. 19  All speeches are available online at www.bankofengland.co.uk/speeches  19  Taking the two together, spillbacks from a tightening in US financial conditions have tripled - accounting for around 6% of the impact of changes in US financial conditions on US GDP. These effects will grow as financial integration continues. Continued transparency around monetary policy will also help EMEs to anticipate Capital Flows-at-Risk, and take pre-emptive actions where warranted. As long as there remains a fundamental asymmetry between the multi-polar global economy and dollardominated international monetary financial system, absent other reforms EMEs may turn to Capital Flow Management (CFM) measures to safeguard financial stability in the face of push shocks.

What is often left out of the euro area storyline is the fact that the monetary union came on top of diverging trends in total factor productivity (TFP) as the catching-up process in the EU came to a stall during the early 1990s 9. A reversal in the catching-up process came regardless of high investments in some peripheral countries and high capital output ratios – rather than a sign of success, high investments were an indication of deeper-rooted problems. 10 Many peripheral countries did not need more investments per se to restart convergence – what they needed was a more efficient allocation of investments. The efficiency of investments fell victim to poor economic governance, rigid labour and product markets, low investments in information and communication technologies, defunct educational systems and the poor quality of corporate management. What the monetary union accomplished against such a background was to create an illusion of continuing convergence on the back of increasing foreign borrowing and investment in non-tradables, rather than to enact discipline in the economic governance of peripheral countries. The adoption of the single currency, followed by the consistent private sector interest spread, elimination of exchange rate risk and implied fiscal bail-out clause, cemented the duality in the quality of economic governance and boosted the suboptimal reallocation of resources in the periphery. So, we have observed financing low-productivity sectors (via real estate or government spending) with debt inflows, instead of capital flows fuelling further “catching-up”.