BIS central bankers’ speeches  3  Another theoretical argument can be made suggesting that independent national monetary policies could be more expansionary when national fiscal policies turn restrictive in the pursuit of fiscal consolidation. In principle, national monetary policies have the advantage of being able to counter the negative pressure on inflation produced by the fiscal tightening. In practice, however, countries in urgent need of fiscal retrenchment do not necessarily experience lower inflation. At present, inflation is higher than the euro area average in Portugal, Ireland, Spain and, in particular, Greece. In a counterfactual without the euro, the national monetary authorities responsible for monetary policy could not implement a more expansionary policy stance than is currently the case in the euro area as a whole without endangering their credibility and the maintenance of price stability. These observations are broadly supported by the experience here in the United Kingdom. Despite the extra degree of freedom offered to policy-makers by remaining outside the euro area, economic activity in the UK remains further below its pre-crisis peak than either in Germany or France. In relative terms, the depreciation of sterling against the euro has not cushioned growth but rather led to a higher rate of domestic inflation in Britain than in the euro area. In sum, I would maintain that there are no clear reasons for believing that cross-country variation in economic performance within the euro area has proved larger than would have been the case if national monetary policies had been retained and the euro not introduced.

Indeed over the past decade international and national institutions have often made forecast errors in the same direction, underestimating inflation and overestimating growth in advanced economies (Chart 6). This has led to an overly accommodative policy. If we want to avoid repeating the same bias, we should be more alert to this issue. Macroeconomic policies Another way in which advanced economies are affected by globalisation is through its unbalanced nature. Globalisation is very advanced in trade and economic activity. In the financial area, however, globalisation is more limited, in the sense that EMEs are characterised by an excessive demand for and an insufficient production of high quality  4  4  L. Bini Smaghi (2011) “The challenges facing monetary policy”, Bologna, 27 January. BIS central bankers’ speeches  financial assets. Many EMEs are net savers and export capital to advanced economies. This is the result of various factors, not least the lower degree of globalisation of their policies and institutions. This limited globalisation can be seen particularly in the lack of independent monetary policies and the pegging of exchange rates, which leads to the accumulation of large foreign exchange reserves and to misaligned prices (Chart 7). As a result of these imbalances, interest rates in advanced economies may be lowered artificially, to a level which may create problems for their pursuit of price and financial stability (Chart 8). Again, in most of our macro models the interest rate which affects global financial markets (the so-called r*) is anchored on the US economy.