the euro, with a significant increase in intra - euro area trade and foreign direct investment ( fdi ). indeed, exports and imports of goods within the euro area rose from about 27 % of gdp in 1999 to around 32 % in 2006. this rise in cross - border trade may to a certain extent be due to the introduction of the single currency, the increased price and cost transparency it helped foster and the absence of exchange rate risk. the increasing interdependence of euro area countries is also confirmed by the considerable growth in intra - euro area fdi flows, with the sum of inflows and outflows in 2006 accounting for around 5 % of euro area gdp – at par with extra - euro area fdi flows. intra - euro area fdi stocks have thus grown considerably, doubling from 14 % of euro area gdp in 1999 to around 28 % in 2006. at the same time, the increase in trade with the rest of the world has recently been even greater than the increase in intra - euro area trade, with the following figures showing that the euro area is very open. from 1999 to 2006 extra - euro area exports and imports of goods rose to 33 % of euro area gdp, from about 24 %. the stronger growth of extra - euro area trade has mainly been due to the more sustained growth in world gdp, an increase in global trade integration and the very sizeable increase in trade with china, emerging asia and the new eu member states that joined the union in may 2004. finally, a factor which may be particularly important for small, open economies is that adopting the euro may provide stronger protection against international financial disturbances. such disturbances have often had a disproportional effect on smaller economies, raising the risks of external shocks. in sum, i would argue that the introduction of the euro has been a great success, showing that clarity of vision, based on sound economic arguments and determined planning and implementation, can yield important results in adapting our economies to the future global challenges. for a review of the literature, see r. baldwin, “ the euro ’ s trade effects ”, ecb working paper no 594, march 2006. 3. challenges related to adoption of the euro nevertheless, there are also challenges related to participation in the euro area which should not be forgotten. as i touched upon earlier, a potential challenge or risk involved in adopting the euro relates to the question of whether the economies that share the euro are relatively similar in terms of business cycles and

although it has become common in the past decade in a wide range of countries, the best examples at present are to be found in asia. type ii economic crises are not caused primarily by bad fiscal policy or bad monetary policy. one of the reasons i have a lot of sympathy for the asian countries at the moment is that they did not get into their present trouble through undisciplined fiscal policy, and their monetary policy in the conventional sense1 was quite good. this is shown by the fact that their budgetary positions are on average much better than oecd economies, and most have inflation rates that are quite low for developing countries. a type ii crisis is really financial in nature, rather than stemming from poor macro - economic policies. its central dynamic is the credit cycle and the main players are companies and banks, or financial institutions more generally. a type ii crisis usually traces its roots to a period when the economy was doing well, growing quickly and becoming popular with investors and lenders. usually, but not always, 2 an inflow of foreign capital is part of the process which bids up asset prices ( and attracts more foreign capital ). domestic banks do not sit idly by - - they join in to 1 conventionally loose monetary policy in a type i sense would involve monetisation of the budget deficit, low ( or negative in real terms ) interest rates, continual downward pressure on the exchange rate and rising inflation. in most asian countries over the past decade, these conditions did not apply ; in fact, the opposite was more typically the case. on the other hand, monetary policy was not tight enough to prevent the strong expansion of the balance sheets of the banks. such a degree of tightness would not have been compatible with the maintenance of a fixed exchange rate. 2 japan in the 1990s is a classic drawn - out type ii episode, but one in which foreign capital played only a minor role. lend money for all sorts of promising projects and asset purchases. if the economy is growing strongly at the time, which it usually is, it looks as though everyone can make money. some of the finance is invested wisely and makes a good return, but much of it is inevitably invested unwisely. a lot of it goes into property or is invested in industries which are already oversupplied. at some point, something happens and the whole process goes into reverse. in the case of south east asian countries, the event that triggered the reversal was the realisation that