same vein i might describe european monetary union as beauty and the beast. the beauty of it lies in intra - european exchange rate certainty. and if you don ’ t find that instantly seductive i suggest you speak, as i have, to some of britain ’ s exporters. they have seen, over the past six months or so, an erratically sharp appreciation of sterling, against the core european currencies in particular, which can ’ t be adequately explained in terms of economic fundamentals. but beauty comes in a package along with the beast, and the beast in this case is the single monetary policy - the single, one - size - fits - all, interest rate. the trouble is that it may not in the event suit the domestic monetary policy needs of the different individual euro - area countries. and if you don ’ t find that instantly repulsive i suggest you ask yourself how, at this particular juncture, we could keep the economic porridge - if i may mix my fairy stories - at just the right temperature if we were obliged now to have german - level interest rates. now you can ’ t just hope the beast will never appear. i don ’ t know of any serious analysis that doesn ’ t acknowledge that tensions could arise between the domestic policy needs of the different member countries - as a result of different cyclical positions, or different fiscal policies, or as a result of external shocks which affect some member countries more than others, or as a result of structural changes in one member country as against another. the risks, like the potential benefits, are, as i say, real. you might more reasonably hope that beauty ’ s beast will turn into prince charming - and that all their problems turn out to be little ones. but i have to tell you that it was always at this point in the story that i began to wonder if my mother was making it all up! in any event, you need to be rather confident that the potential tensions are indeed likely to be minor, or at least short - lived, because, if they do turn out to be serious, then you could be stuck either with a weak euro - and more rather than less inflation, higher rather than lower interest rates over the medium - term, and exchange rate instability against outside currencies - or, if the european central bank is allowed to do its job in accordance with its statutes, you could be stuck with persistent stagnation and unemployment across the economically weaker parts of the euro - area.

we work hard at fostering a close relationship, helped by the fact that i am a member of the fsa board and howard davies, who is giving the key - note address tomorrow, is a non - executive director of the bank. our respective roles and responsibilities, including in a crisis, are set out in a formal memorandum of understanding published in the autumn of 1997 between the treasury, bank of england, and fsa. the mou also established a tripartite standing committee that meets monthly to exchange information and discuss current threats to financial stability. i like to think that, with the departure of responsibility for day - to - day supervision of individual institutions, the bank has addressed the issue of systemic stability with a new - found clarity of purpose. that said, we know that there is a huge amount of work still to be done on understanding systemic risk. i see a clear contrast here with the monetary policy field. in monetary policy, we are closer to a general consensus about the policy framework and the objectives of monetary policy, even if at any moment of time uncertainty still surrounds our forecast for inflation and the appropriate policy response. certainly the uk target for monetary stability ( the 2. 5 % symmetrical inflation target ) is clear and transparent. in the field of systemic stability and financial crisis, however, our understanding is at a very preliminary stage. we face an array of fundamental questions : how to define systemic stability ; how to measure and predict it ; what policy weapons we should employ to achieve it ; what the costs are if we fail ; and how best to resolve instability if it occurs. we have only partial answers to these questions. defining the objective is possible only in the broadest sense, measuring how close we are to it is even more difficult ; there is certainly no agreed single indicator or set of indicators which tell us when we have achieved financial stability or when we risk failing to achieve it. importance of financial stability in part this is because we still lack evidence. this comment may strike some of you, perhaps those from scandinavia or japan, as ironic ; you may feel that the body of evidence we have is already disagreeably large. however, whilst banking crises are not exactly rare, they are episodic rather than regular and they tend to exhibit a number of idiosyncratic characteristics. this is in some sense reassuring – at least banks and the authorities do not keep making exactly the same mistakes – but at the same time it makes predicting crises very difficult. the causality is complex