– can have many causes. they may arise, for example, because large parts of the system rely on the same sources of funding, or because they have similar exposures – to rising financial imbalances, to currency mismatches and to widespread mis - pricing of risk. we have also seen that turbulence can arise from relatively modest initial shocks. the system is so interconnected that what looks stable can turn out to be “ meta - stable ”, which means potentially highly instable. snow on mountain slopes can be meta - stable, looking pristine and tranquil yet turning into an avalanche after only a minor disturbance. the meta - stability of a system is a complex concept, which calls for analysis of the interplay between diverse phenomena. in financial systems, these phenomena include herd behaviour, complex networks of relationships between counterparties, and contagion from common or correlated exposures to particular asset classes. they also include the undesirable pro - cyclical effects of prudential rules, of accounting rules, of credit rating agencies, and of compensation systems that put undue emphasis on short - term earnings. on this last point, i will say that the so - called bonus culture is one of the many factors that can drive the financial system in the wrong direction – away from intermediation to selfreferential speculation ; away from medium - term stability to short - term orientation ; and away from being a service sector to being a self - serving sector. i have outlined the key features of systemic risk that underlie the need to establish a new framework of macro - prudential supervision. in the case of europe, there is still one more reason, and that is the existence of the single european market. the single market makes the financial system much more fully integrated than it would otherwise have been – in terms of how it is set up, in terms of how it is regulated and in terms of the linkages with the real economy that itself is structured by the single market of the eu. cross - border and cross - sectoral financial integration within the eu is fostered by competition, freedom of establishment and the free flow of capital. the extent of integration within the eu ’ s financial sector is a substantial achievement and it should be safeguarded in the aftermath of the crisis. about 40 % of foreign claims by uk banks are in the euro area, and roughly the same share can be observed in the opposite direction. 1 therefore, we europeans have all the reasons to create a

willem f duisenberg : what exactly is the responsibility of central banks of large economic areas in the current slowdown of the world economy? speech by dr willem f duisenberg, president of the european central bank, at the international monetary conference, singapore, 4 june 2001. * * * the topic of the introduction i have been invited to provide at the central bankers'panel is both challenging and welcome. the challenge is to answer a question that has been hovering around in recent months : should the euro area assume the role of a " global growth engine " in the current slowdown of the world economy? the opportunity to address this issue directly is welcome, as it allows me to elaborate on the role the european central bank ( ecb ) must play in this field. in doing so, however, i shall start first by briefly recalling the objective of the monetary policy of the ecb, which provides an essential background to the analysis of the responsibility and the challenges the ecb faces with respect to the current slowdown of the world economy. the primary objective of the ecb, as the treaty of the european union defines it, is to maintain price stability in the euro area. the governing council of the ecb has defined price stability as " year - onyear increases in the hicp for the euro area of below 2 % ". furthermore, it was made clear from the outset that price stability should be maintained over the medium term. by unambiguously assigning the primary objective of price stability to an independent central bank, the treaty recognises that focusing monetary policy on the maintenance of price stability in the euro area ensures that monetary policy will make the best possible contribution to improving economic prospects. this view is rooted in the fact, supported by decades of practical experience and empirical evidence, that the benefits of price stability for growth are substantial. without putting forward all the arguments, allow me to highlight, in particular, that the maintenance of price stability helps to allocate resources efficiently both across uses and across time. inflation causes economic agents to confuse transitory with permanent price changes, and therefore distorts their decision - making process. in evaluating investment opportunities, firms need to have confidence in the signals conveyed by relative price changes, and to discriminate between relative price adjustments and general changes in the overall price level. this process is facilitated in a situation of overall price stability. price stability therefore improves the transparency of the relative price mechanism and can promote an adequate environment to increasing the growth potential