to business and offering more investment choices and portfolio diversification to savers. as was recognised in the giovannini report 20 years ago, there is very good reason to believe that improving the efficiency with which savers are matched to borrowers increases economic performance. the second objective should be to enable greater risk sharing across the eu by creating deeper cross border markets. cross border investment allows economic risks – upside and downside – to be shared across individual countries. done in the right way, this can help to smooth out the impact of the economic shocks that hit individual countries – reducing the danger of economies sliding into very deep recessions that can permanently damage their ability to grow. while this smoothing through risk sharing is of benefit to all eu members, as the recent crisis has shown it is particularly important for the euro area given the relative lack of adjustment mechanisms available to individual euro members when they are hit by shocks. and, the third objective should be to create resilience by ensuring that if the banking system is damaged there is an effective alternative channel of finance to the real economy. it is very probable that one of the reasons the us has recovered faster from its financial crisis than europe is that in the us banks do not dominate the provision of finance to anything like the same degree as in the eu. when the banking system was damaged in the us, a welldeveloped alternative existed to help meet the financing needs of the real economy. to achieve these three objectives, reforms will be needed on both the supply and demand side of the equation. the supply side of the equation has two dimensions. first, enabling more household and corporate savings to flow to vehicles that will invest in capital markets. and second, encouraging more investors to allocate capital across the borders of eu members – or, to give it its technical name, to reduce “ home bias ”. as i have noted, assets under management in europe outside the banking system are typically around half the size of the us. creating large pools of market - based private capital is in part about creating the right investment vehicles. it will also require a more fundamental look at the way europeans save and the way those savings are invested, including for their pensions which in many member states are concentrated in public sector schemes. in practice, this will mean examining whether there are obstacles and competitive distortions that restrict savings being invested in financial markets ; ensuring investors have the information they need including about the landscape of investment options ; and reducing any barriers that restrict market access or encourage any

##tains to new vehicles, where it may be more appropriate to treat pollution control and mandatory safety equipment, at least in part, as raising price to a consumer rather than improving quality, as is the present practice. but the potential downward bias introduced by current methodology for such equipment can only be slight. we should be prepared to embrace credible new research on quality adjustment, regardless of whether that research points to additional sources of upward bias or previously undetected instances of downward bias. nonetheless, currently available evidence very strongly supports the view that, on balance, the bias is decidedly toward failing to appropriately capture quality improvements in our price indexes. there is little reason to believe that this conclusion will change unless we alter our procedures. a more difficult quality related issue is whether to reflect changes in broad environmental and social conditions in price measures that are used for indexing various components of federal outlays and receipts. that is, should the cpi reflect the influence of factors such as the level of crime, air and water quality, and the emergence of new diseases, which are not specifically related to products that consumers purchase? there is little in the record to suggest that, when it enacted the indexation of social security benefits in 1972, the congress intended for the beneficiaries of that program to be compensated for changes in such environmental and social factors. nor do these issues appear to have been raised when congress debated the indexation of various tax parameters during the 1980s. taking account of such conditions, particularly those that lie outside of the markets for goods and services, would be an interesting exercise in its own right, but would appear to extend well beyond the original intent of the congress. a considerable professional consensus already exists for at least two actions that would almost surely bring the cpi into closer alignment with a true cost - of - living index. first, we should move away from the concept of a fixed marketbasket at the upper level of aggregation, and move toward an aggregation formula that takes into account the tendency of consumers to alter the composition of their purchases in response to changes in relative prices. the bls already calculates such an index on an experimental basis with a lag of about a year. if the bureau adopts the boskin commission ’ s recommendation that it publish a “ best practice ” version of the cpi with a lag of a year, it should, without question, build that index on the foundation of a variable marketbasket. there is a somewhat more difficult issue as to whether the concept of