Exchange rate certainty within Europe - even though only within Europe, and even though it is nominal exchange rate certainty rather than real exchange rate certainty, which is what matters in terms of competitiveness - would potentially enhance the benefits to be derived from the European Single Market. The euro’s second very powerful advantage is the possibility it opens up for much broader and more liquid financial markets. It will mean a progressive narrowing of spreads between borrowers and lenders, which is good news for the users of those markets - and that will be good news too for financial intermediaries as a group, because it will lead to higher volumes of financial activity. Not every individual intermediary will benefit, of course, in the more competitive environment, but those who survive will thrive! The City of London is already making an important contribution to this process of euro financial market integration. It is in fact the greatest contribution that the UK can make to the success of the 1  BIS Review 71/2000  euro while we remain outside. (It runs alongside the conceptually distinct, but closely related, pressure for broader international integration of financial markets, currently reflected in a spate of initiatives to unify trading platforms, and both clearing mechanisms and settlement systems, in which London, of course, is also very much involved.) These then - nominal exchange rate certainty throughout the Eurozone and integrated euro financial markets - are potentially powerful economic arguments in favour of UK membership.

Consequently, applying the policy rate or regulatory tools as the situation requires may be the most practical path. Let me now shift the focus from monetary policy to the work on financial stability, but the issue will still to a large extent be how to achieve a balance between financial stability and monetary policy. Challenges for regulatory design Not only the regulations but also the whole area of macro-prudential surveillance aiming at financial system stability have become a highly topical issue in the aftermath of the latest crisis. Prior to the crisis, financial regulation was excessively focused upon individual institutions under the erroneous assumption that the system would remain stable as long as the individual institutions were stable. Consequently, processes that created risks on the system level were ignored. I certainly welcome the current international discussion regarding the inclusion of more explicit systemic-risk preventive regulations, or macro-prudential regulation, in the regulatory framework. An important challenge for the design of a new regulatory framework will lie in finding an appropriate balance: On the one hand, the regulations will need to be sufficient to effectively reduce the risk of financial crisis; on the other hand they should not be so stringent as to impose unnecessary costs on the financial sector. It is a matter of finding the right level of regulation. In this context it is very illuminating to read the so called MAG and LEI reports which attempt to translate various levels of Basel III-regulation into estimated higher interest costs for the end-borrower.