the “ subservient role ” they are supposed to play. such fears apply, for one thing, to the relations of the global financial markets with national monetary, economic and fiscal policy. anonymous market forces constrict policy makers ’ national room for manoeuvre. this may lead to tensions because domestic policy - making normally claims to be sovereign. but, at least insofar as the financial markets thereby lessen the scope for a monetary policy that is detrimental to stability and a fiscal policy that inflates debt, the economist will not deplore that fact unduly. for a policy that fosters inflation and exacerbates national debt widens scope, at the most, for a temporary period ; in the longer run, any such scope is narrowed. but there is a second dimension to the misgivings that the financial markets are no longer duly performing their subservient function. that relates to the relations with the real economy. in itself, a high volatility of financial market prices may affect real economic decisions. for example, enterprises may increasingly switch to hedging against the risk of sharply fluctuating exchange rates not only by means of financial contracts such as currency futures, but also by diversifying the locations, in terms of different currency areas. prolonged distortions, such as misalignments of exchange rates or bubbles in asset prices, are all the more problematic. it is not only that the financial markets distort real relationships. the relevant adjustments are often sudden and violent, as in the case of the european monetary system early in the nineties, or of mexico. it is precisely such crisis - like upheavals that prompt the question of whether and, if so, to what extent today ’ s financial markets have become more unstable, and whether systemic risk has increased? some people fear that the advance of professionalism among fund managers and institutional investors, in particular, might increase the incidence of such dangers. their thinking is determined primarily by the short - term performance of their portfolio. in certain situations, that may intensify the “ herd instinct ”, triggering a “ rush to the exit ”. at the same time, new financial instruments make it easier for them to incur higher risk positions. swings in sentiment may then lead all the more easily to precarious situations. on the other hand, the greater international diversification of investments makes the markets fundamentally more resilient today. furthermore, owing to the

exception of the united kingdom – is still predominantly bank - based, the us tradition is much more market - based. economists have debated which system is superior for decades, if not for centuries. 1 this is neither the time nor the place to repeat the whole debate about advantages and disadvantages of the respective systems. allow me, however, just to name some significant points of the discussion. there is empirical evidence to suggest that market - based systems react more procyclically than bank - based economies because of more pronounced asset levine, r ( 2002 ) : bank - based or market - based financial systems : which is better? in : journal of financial intermediation 11 ( 4 ), pp 398 – 428. bis central bankers ’ speeches price booms and busts. 2 however, bank - based systems are also beset by procyclicality. a study conducted by the bank for international settlements has shown that, while bank - based systems are more effective at smoothing the impact of business cycle fluctuations, marketbased economies recover more quickly after crises. 3 leaving aside the pros and cons of the two systems, it is my strong belief that the question of the proper financing source cannot be answered with “ either / or ” but has to be “ both ”. in the end, it comes down to the uncontested argument of diversification. and the answer is highly dependent on the context. in europe for instance, the bank - based system reflects the corporate structure of the economy – there are many small and medium - sized entities, the so called smes. and – like in the united states – the smes tend to favour bank - based financing, if only as necessity because there are barriers for small companies to obtain market financing. against this backdrop, i very much appreciate the european commission ’ s efforts to establish a european capital markets union. by making it easier for small and medium - sized enterprises to access the capital markets, we could open up a further source of funding for them. to make one point clear : referring to what i said before about “ either / or ”, the objective of the european capital markets union is not to abandon bank - based funding but to supplement it with capital markets - based funding. and in europe of all places there is plenty of scope to do so. the european stock market is only 60 % of the size of the us stock market as measured in relation to gdp. similarly, the european market for venture capital is