. i have just addressed one of these, namely that fairly large rate rises may be required to slow down, for example, a rapid increase of debt. even if the effect of this on inflation is not considered so important, it is more difficult to disregard that the effect on output and employment could be significant. the issue can also be considered from a more general perspective. thinking about it, it would be quite strange if the main way of preventing financial crises was to hold monetary policy tighter than could be justified by basic economic prospects. as i see it, financial cycles, at least those which are big enough to create significant disorder, are often the result of the regulations governing the financial system not being sufficiently stringent or even, perhaps, of fundamental shortcomings in the entire ‘ business model ’ of the financial sector. the failure of important markets to function sufficiently well may also be of great significance. one example that i have raised before, but which is worth raising again, is the comparison of how policy rates and housing markets have developed in sweden and germany ( see figure 6 ). despite a similar monetary policy, the development of housing prices in germany has differed entirely from that in sweden. of course, a wellfunctioning financial sector and well - functioning markets would not generate completely stable credit paths, for example. but it is highly likely that the large and dangerous fluctuations would be heavily restrained. it seems reasonable that the financial system should be sufficiently stable and robust to be able to handle both an occasionally very low neutral interest rate – as is the case today – and that monetary policy is conducted in a manner that fulfils normal monetary policy targets – such as an inflation target – without collapsing. 20 if it is deemed that the financial system is insufficiently stable to cope with this, the most reasonable and long - term sustainable solution must be to ensure that it becomes so rather than dodging the problem and instead demanding that the central bank slows down the entire economy by setting an unnecessarily high interest rate. 21 20 the term neutral interest rate normally refers to the real interest rate, which has neither an expansionary nor a contractionary effect on the economy. central banks cannot influence the neutral interest rate but they must consider it when they adjust their policy rates. for an analysis of the level of the repo rate in the long term, see the article “ the long - term repo rate ” in the monetary policy report, february 2017. 21 see, for example, wolf

current economic expansion, it is essential to sustain the momentum toward improving public finances and to accelerate the pace of fiscal consolidation. this would strengthen the capacity of the euro area to adjust to external shocks, increase consumer and investor confidence, and hence support growth and employment. to conclude, the euro area has indeed come a long way. the success of the single currency has demonstrated that one size can fit all. such has been the success of the euro area that it has given rise to considerations, still at an early stage, of regional currency arrangements in africa, asia and latin america. nevertheless, much more needs to be done to ensure that the euro area becomes a more dynamic force for growth in the global economy on a sustainable basis. it is my view that the experience of the euro area to date only serves to highlight the fact that a currency union requires more flexibility in factor and product markets, and greater competition than do independent monetary areas. flexible markets and strict fiscal rules are not just superfluous conditions for members of a monetary union. they are necessities that make monetary union work by providing the adjustment mechanisms that the one size fits all monetary policy cannot. references : baldwin r e ( 2006 ) “ the euro ’ s trade effect ” ecb working paper, no. 594. de grauwe p and mongelli f p ( 2005 ) “ endogeneities of optimum currency areas : what brings countries sharing a single currency closer together? ” ecb working paper, no. 468. rose a and stanley t d ( 2005 ) “ a meta - analysis of the effect of a common currency on international trade ”, journal of economic surveys, vol. 19.