, potentially a sign of a dysfunctional market? obviously, reasonable people can disagree substantially on the answers to these questions. strongly diverging prices of, for instance, government bonds may well be a sign of market fragmentation. however, determining the adequate risk premium as part of an interest rate is a highly difficult exercise. and central banks usually do not know better than market participants what the adequate risk premium or price should be. coming from the private sector myself, let me add that central bankers should not even attempt to know better. and even if central bankers were to observe differences in prices or risk premia, this may be due to structural causes. bis central bankers ’ speeches allow me to make this point as clear as possible. segmented markets are primarily the symptoms of underlying structural causes, which usually explain most of the differences. this applies, for example, to government bond markets, to the corporate credit market as well as to the interbank money market. even if prices on these markets differ markedly among market participants or countries, it would be premature to interpret such differences as a definite sign of market exuberance or market malfunction, as a sign of irrationality or as a sign of inefficiencies. nevertheless, financial fragmentation can pose a challenge for the single monetary policy in the european monetary union ( emu ), not least with respect to the monetary policy transmission channel. how can the eurosystem contribute to reducing fragmentation? the single monetary policy cannot make a distinction between differing economic and financial conditions among emu member countries. instead, what matters for the single monetary policy is the aggregate situation of our monetary union. in this context, a well - known mechanism applies : the more similar economic conditions and economic policies of member states are, the more suitable the single monetary policy becomes for each member country. does this, in turn, mean that economic conditions as well as economic outcomes need to be the same in every single member state of a monetary union? no – in fact, on the contrary : if national economic policies and national public preferences are different from one country to another, national economic outcomes will differ as well. these differences will then be mirrored in different financial market conditions. therefore, even in a monetary union, different economic conditions are basically the rule and not necessarily an exception or a sign of a market dysfunction. differing outcomes – not only in the financial sphere – are, in fact, compatible with a monetary union – as long as economies do not diverge too strongly and

we have to accept the structural differences between economies. this brings me back to the main points of my speech. first, that diagnosing fragmentation requires normative judgement. second, fragmentation often reflects structural differences and is not bad per se. third, that the banking union will be an important step towards more bis central bankers ’ speeches integrated financial markets. and last but not least, differences or fragmentation in the real economy may be justified as well. since a speaker should exhaust the topic, not the audience, i will close my introductory remarks here. thank you for your attention today, and i wish you a productive and rewarding discussion. bis central bankers ’ speeches