##zation of the business cycle. these developments contribute to dispel the risks of asymmetric shocks in the future. what does not disappear is the risk of an initial period of excessive expansion of expenditure and debt after joining a monetary union that guarantees a regime of low inflation and low interest rates. we have felt the consequences of this hazardous development. the economy, however, has automatic correcting mechanisms as economic agents soon have to begin restraining their indebtedness and adjusting their spending. in spite of the restrictive nature of this mechanism we could have achieved a gradual soft landing of the economy if two new factors had not made their appearance : the strong deceleration of the world economy and the budget crisis that emerged in 2001. the government had to adopt difficult measures of budget consolidation to reduce the structural deficit from – 4. 6 per cent of gdp to – 2. 5 per cent last year. the recession we are now going through, with annual growth this year around – 1 per cent, is making things more difficult for fiscal policy. more than others, we would have justification not to comply exactly with the present fiscal rules. however, as small nations always have to try harder, we still hope to be able to cope with the situation, in spite of being very much dependent on developments of the world economy. an economic recovery is definitely coming, even if some doubts remain about its intensity or duration. in fact, uncertainties remain in connection to the large unbalances existing in some economies. it is deceptive to think that everything can be solved by exchange rate adjustments. the problem is one of saving rate insufficiency and will require internal financial adjustments. in the process of global economic adjustment europe should not bear the main burden of exchange rate corrections. the responsibility of europe is to implement the necessary reforms in order to increase its rate of potential growth. we need to deal with the very serious consequences of negative demographic developments, of technological shortfalls and the requirements to flexibly adjust markets to the demands of the new international environment. we need good structural policies to restore confidence in the future. these reforms are a condition to preserve the basic features of the european model, that particular combination of stability, growth and social cohesion that has made europe a beacon of civilization. it is indeed in europe that one can find the most humane and progressive societies compatible with the human condition. but, in the present world environment, like in the hegelian “ aufhebung ”, we have to transform

arising from effective exposures to the same hedge fund through funds of funds or from investments in different funds with similar trading strategies. current restrictions on hedge fund investors, which limit direct investors to institutions or wealthy individuals, reflect the recognition of the difficulties that a retail investor would face in adequately assessing these types of risk. but as instruments and trading strategies become more complex and intertwined, even the most sophisticated investors will be challenged to make reliable judgments about their risk exposures. likewise, complex and difficult - to - value financial instruments could be exploited as vehicles for profiting from insider trading or market manipulation, although, as history shows, simpler instruments can be used in this way as well. policymakers must be confident of their ability to detect such market abuses when they occur. a principles - based, risk - focused approach how best to respond to these daunting challenges? as i noted, there are powerful arguments against ad hoc instrument - specific or institution - specific regulation. the better alternative is a consistent, principles - based, and risk - focused approach that takes account of the benefits as well as the risks that accompany financial innovation. some commentators have sought to draw a sharp distinction between the approach to financial regulation in the united states and that in the united kingdom. these observers have characterized the british approach as being principles - based and as using a " light touch " – the implication being that these two features somehow go together. in a speech in february of this year, sir callum mccarthy, the head of the united kingdom's financial services authority ( fsa ), took issue with this interpretation. 1 sir callum confirmed that the fsa's approach is built on a framework of principles, although he noted that the fsa also has an 8, 500 - page rulebook to accompany the eleven principles it has laid out. but the fsa head rejected the view that their approach is " light touch. " rather, he said, it is risk - based, which means that regulatory resources and attention are devoted to firms, markets, or instruments in proportion to the perceived risks to the fsa's regulatory objectives. in fact, as in the united kingdom, the principles - based, risk - focused approach to regulation has had considerable influence on this side of the atlantic as well. for example, as you may know, the president's working group on financial markets ( pwg ) recently issued a statement of principles – ten in this case – relating to the regulation of private pools of capital, including