deliver a broad based assessment of economic developments in the arab economies but rather as an economist i will stick to the principle of comparative advantage and as a central banker i will concentrate on the issue of monetary integration. it is an issue that plays an important role in the current policy agenda in many countries on the arab peninsula. and it is an issue where i can draw on our own european experiences to exemplify the terms on which a european - arab dialogue can be established. the regional monetary integration initiative is, in my view, a quite astonishing development that does not get the attention it deserves. in fact, in economic terms, it is the second most important monetary integration initiative in the world economy. with its plan to introduce a monetary union in 2010 the economies of the gulf cooperation council ( gcc ) endeavour on a project that is surpassed only by the european monetary integration. this development is of interest to germany and europe for a number of reasons. firstly, the six gcc member countries bahrain, kuwait, oman, qatar, saudi arabia and the united arab emirates are by far the most important trading partners for germany in the arab world, accounting for nearly 55 % of german exports to the arab region in 2004. secondly, the debate about the benefits of monetary integration and the attempt to build regional currency blocks has become much more attractive since the successful launch of the single monetary policy in europe. so europe ’ s experiences after over six years of the common currency might be of interest to those economies currently endeavouring into closer monetary and financial integration. this, of course, is not to say that the example of the euro area can and should be uncritically carried over to other regions with different economic structure, cultural background and political systems. nevertheless, there are distinct pre - conditions necessary for the functioning of a currency union that are common to each and every project of closer monetary cooperation – even though the recognition of the empirical truth that a “ one size fits all ” approach is not doing justice to the many projects of regional economic and monetary cooperation throughout the globe. 1 thirdly, in that context the proper functioning of emu has been questioned in some camps over recent weeks. in cases where this might have created some irritations in other parts of the world which are less familiar with what is going on in emu some brief comments are necessary to put things in a proper perspective. please let me start with the latter point. without any doubt, one of the major institutional changes in the international financial system in

good. nevertheless, central banks can play a productive role in safeguarding financial stability. it certainly makes sense to harness central banks ’ high level of expertise with regard to financial stability risks. however, the " weapon of choice " for combatting these risks is not monetary policy – it is macroprudential policy. in his first speech as a governor at the federal reserve board, ben bernanke demanded : " use the right tool for the job. " 8 to stretch the analogy with the african fauna further, this is something we could compare to the feeding habits of zebra and wildebeest. they graze alongside each other, of course, but they actually feed from different grass heights, with zebra preferring taller grass and wildebeest focusing on short grass. researchers have attributed this selection to anatomic differences in mouth dimensions. 9 in a similar vein, macroprudential instruments can be used in a far more targeted way than monetary policy. they cut the grass at a different level, so to speak. this is of particular use with respect to the euro area. macroprudential tools can be employed at the level of member countries to combat problematic developments in national financial systems – developments that cannot be counteracted by the single monetary policy. one of the instruments to address exuberance in the financial system are countercyclical capital buffers. moreover, as real estate markets have underscored their destabilising potential during the last crisis, many tools are geared explicitly towards this market. caps on the loan - to - value or debt - to - income ratios are two examples of instruments that allow for a tempering of the demand for mortgages. however, if we are to deploy these new policy instruments, we need to gain a better understanding of how they affect macroeconomic performance and interact with monetary policy. a forthcoming bundesbank discussion paper points out the danger of " financial dominance ". within a dsge model, vivien lewis and markus roth demonstrate that, if macroprudential policy is too lax, monetary policy may be forced to do the job by driving inflation above its price stability target and reducing the real burden of private debt. 10 thus a stringent macroprudential reaction to financial stability risks is also a means to protect monetary policy. to ascertain when we should adjust macroprudential tools, and by how much, we need to know how effective these tools are, and whether the transmission channel is subject to lags