Francois and R. Portes (Economic Policy 24, 1997) emphasising the importance of institutional assurance for investors. The European Commission also highlights the importance of this in its study published in May 2001. BIS Review 9/2002  3  annual GDP over 15 years. If the EU's GDP during the corresponding 15-year period increases by only 0.2 per cent a year thanks to the integration with central and eastern Europe, the enlargement would involve socio-economic gains. The remaining obstacles Having said this, there is no reason to believe that the enlargement process will be simple and painless, for either the new members or the old. Despite all of the changes the candidate countries have undergone over the past decade, EU membership will involve a period of major new upheavals. Many countries still have remnants of unprofitable state-owned industries that are propped up by central government finances. The banking system is still undeveloped – lending still corresponds to only a fraction of the countries' GDP, while in countries like Sweden it is roughly the same size as GDP. A properly functioning housing market and housing financing does not yet exist. The actual EU entry requirements involve extensive changes in legislation, administration and the implementation of regulatory frameworks, in addition to the weighty but necessary investments that are required to bring environmental protection and infrastructure up to EU standards. It is precisely because there are already so many requirements made of the countries, that the EU process should not further burden them with informal requirements and expectations.

Of course financial innovation and the creation of highly opaque and leveraged financial derivative products, such as CDOs, also helped amplify the severity of the problem and transmit the shockwaves across the global financial system. The result: the global financial system nearly collapsed. Fiscal discipline More often than not monetary discipline breaks down because of the lack of fiscal discipline. One major reason why the US had to abandon the Bretton Woods system was the huge fiscal burden of financing the war in Vietnam, which also led to a sharp deterioration of the current account position of the US. There have been many examples of Government spending beyond their means resulting in the piling up of government or public debt. In the case of Argentina, the lack of fiscal discipline eventually brought down the Currency Board System that had served as an anchor of monetary stability for Argentina since 1991. In the case of Europe, the sovereign debt crisis that we are seeing now has been the consequence of a breakdown of the fiscal prudence and discipline over many years. Very few people would now doubt that macroeconomic and financial stability could be achieved in the longer run in the absence of fiscal discipline. Market discipline This is probably the most complex if not intriguing dimension of the three disciplines needed to maintain financial and macroeconomic stability. Traditionally, we all believe that market forces would be the last guard when national authorities failed to exercise monetary or fiscal discipline or both.