The current mandate of the EFSF not only allows it to extend temporary loans to euro area governments in need, but also to buy bonds in both the secondary and primary markets, to act on the basis of a precautionary programme and to finance bank recapitalisations through loans to governments including in non programme countries. The resources committed to the EFSF are substantial. The ESM, which will have a paid-in capital of € billion and callable capital of € billion, has a capital base around three times that of the European Investment Bank. At the 26 October Euro Summit euro area leaders also agreed on two schemes which will allow a significant leveraging of existing EFSF resources in order to increase the fund’s ability to act. But perhaps the most significant development, relative to past expectations, is the implementation of root-and-branch reform programmes in a number of euro area countries. 4  BIS central bankers’ speeches  One should not underestimate the significance of EU-IMF programmes for structural changes in some economies. They are dealing with long-needed pension reforms, opening up closed sectors of the economy, modernising public administration. In terms of collective economic management, this development goes further than many federations. Can we imagine, for example, the U.S. federal government requiring a similar depth of reform in California? Countries outside of EU-IMF programmes have also implemented major reforms. Spain has recently passed a constitutional balanced budget amendment, disproving the view that major policy changes are impossible in an election year.

It is important to have sufficiently developed domestic financial markets, sound macroeconomic conditions and sound institutions in place. Also important is a surveillance mechanism to monitor capital inflows and outflows. Of particular importance is the monitoring of the accumulation of external liabilities by the financial system and the private sector. Advance knowledge of imbalances and risks would facilitate early actions to manage emerging vulnerabilities. An appropriate exchange rate regime Finally, I would like to mention the significant value to national resilience of having an exchange rate regime that is aligned to the economic fundamentals. It is important to understand that the exchange rate is a means to an end and not an end in itself. Its purpose is to provide a fair rate of exchange between goods and services that are produced in the domestic economy with those that are produced abroad. Trade and investment is facilitated by an exchange rate that is stable and reflective of economic fundamentals, not by one that is volatile and unstable and subject to speculative capital flows. The exchange rate should also not be manipulated to cater to narrow sectoral interests. For every change in the exchange rate that benefits one sector, there would be another sector that is disadvantaged. Therefore, the exchange rate policy has to rise above sectoral interests and consider the overall economic implications in deciding on the appropriate exchange rate. It is also not prudent to respond to short-term trends or to focus solely on developments in bilateral exchange rates.