making our monetary union more resilient. when it comes to resilience, the question of risk sharing has to be addressed. how can shocks that hit individual member states particularly hard be cushioned? in the united states and other large currency areas, shocks are spread through the distribution of business profits and losses throughout the currency area, because company owners are often resident in other states. the sharing of losses across state borders in the united states absorbs around 40 % of an economic shock. 4 saving and lending could represent another channel of private economic risk sharing. enterprises and households take out loans in different us states during an economic downturn to bridge a slump in earnings. in the united states, this type of risk sharing smoothes something like 25 % of a shock. to some extent, this includes a contribution of the federal deposit insurance corporation to this form of risk sharing. in europe, however, the conditions for putting in place a similar euro - area - wide deposit insurance mechanism are not yet met. i will come back to this point in a few moments. by comparison, risk sharing through fiscal policy takes a back seat. only between 10 % and 25 % of all risks are shared by a common fiscal policy in federations like the us or canada. 5 it is thus clear that much could be achieved in the euro area if cross - border corporate funding were strengthened, particularly in the form of equity capital. a raft of measures would be needed to tear down the walls in european capital markets. standardising national insolvency regimes is just one especially important step worth mentioning. after all, investors need to count on having the same level playing field throughout europe. not only would that promote private risk sharing ; it would also reduce capital flows into less productive businesses and stimulate flows in more productive ones. that, in turn, would boost economic momentum, as a recent oecdresearch paper confirms. 6 on a general note, the development of equity capital markets, including in europe, is suffering 3 / 5 bis central bankers'speeches from the preferential tax treatment given to debt over equity capital. 7 interest payments can be deducted from taxable income ; equity costs cannot. eliminating this bias would encourage businesses to make greater use of equity capital as a funding instrument. and that would facilitate greater private risk sharing whilst at the same time reducing the debt bias. another way in which risk could potentially be shared in times of crisis might be for enterprises and households to take out cross - border loans

our monetary policies. this will tend to bring about convergence in the inflation rates of the partner states, although each country ’ s inflation rate will not necessarily be equal to that of all the others. i am under no illusions that the process of aligning our bilateral exchange rates in a sustainable manner, so that they can eventually be replaced with a single currency, will be anything other than very challenging for policymakers. there are important lessons are to be learned from the experience of the european exchange rate mechanism in the 1990s, the precursor to the euro. some of you may recall the exchange rate crisis of the erm in 1992, when the exchange rates of some of the erm members were ripped from their bands by a whirlwind of speculation in the foreign exchange markets. i hope that our colleagues in the european central bank will be able to provide useful advice on how we can mitigate the risks of experiencing a similar exchange rate crisis during the transition to monetary union in the east african community. in recent years the national central banks of the east african community have mostly pursued flexible exchange rate policies, with only limited intervention in foreign exchange markets, mainly to dampen exchange rate volatility. therefore, the transition to monetary union will require radical changes to exchange rate policy as well as to monetary policy. the national central banks will have to devote more technical resources to understanding what the optimal levels for their exchange rates are and how to manage their exchange rates using both monetary policy instruments and intervention in the foreign exchange markets. our monetary policy frameworks will have to be refocused primarily on our exchange rate objectives and each central bank will have to pay close attention to the monetary policies of its partners in the east african community. at the regional level, the central banks will have to determine how we can best harmonise our exchange rate policy objectives with the objective of maintaining low inflation within the east african community. clearly, very close collaboration between the central banks in setting monetary and exchange rate policy is imperative, if the transition is to be successful. fiscal policy fiscal policy is the second pillar on which a successful monetary union rests. fiscal policy is crucial for both economic convergence, and perhaps even more importantly, for the credibility and sustainability of the monetary union. fiscal policy matters for economic convergence because it affects aggregate demand and interest rates. hence if there are major differences in the fiscal stances of the east african community partner states, this will undermine efforts to synchronise economic cycles, and may also create pressures on bilateral