unemployment rate in the netherlands was the lowest in the euro area. bis central bankers ’ speeches the divergences in unit labour cost developments and price competitiveness within the euro area are reflected in the current account balances of the individual countries. as you can tell from this chart, before the crisis, most southern european countries and, to a lesser extent, ireland experienced high and steadily increasing current account deficits, while the current account surpluses of germany and the netherlands improved further. for many years it was thought that in a monetary union, the current account balances of individual countries were no longer relevant. it was only the balance of payment of the euro area as a whole that mattered. we know better now. of course, besides competitiveness problems, the crisis also had fiscal causes. bis central bankers ’ speeches as can be told from the chart, the stability and growth pact didn ’ t prevent some governments from taking up old habits once they had fulfilled the convergence criteria that enabled them to join emu. we shouldn ’ t forget, however, that this was facilitated by some of the core countries of emu. when it became clear that fiscal policies in these core countries wouldn ’ t be able to meet the rules of the stability and growth pact, it was not the policies that were changed but the pact. this was clearly a mistake. besides, the gradual deterioration of the budget balance in countries like italy and portugal was partly due to their competitiveness problems. since devaluing out of these problems was no longer an option, the decline in competitiveness slowed down economic and employment growth. this dampened tax revenues while stimulating social security expenditures. looking at it this way, the lack of fiscal discipline partly reflected the lack of macroeconomic discipline. more in general, budgetary policy was supposed to absorb temporary cyclical differences, by allowing the automatic stabilisers to do their work. for example, during a downturn, public spending automatically goes up as more people receive unemployment benefits, while tax revenues decrease. such ‘ automatic ’ response to cyclical developments stabilises the economy. but in most member states, the automatic stabilisers have failed to operate properly since 1999. instead, a number of governments followed pro - cyclical budgetary policies, by loosening the budgetary reins during the economic booms, and tightening them during the busts. in other words, budgetary policies have hampered the functioning of emu. budgetary discipline in emu was supposed to be exacted

the basel arrangements and implemented in the uk, was the absence of any effective regulation of liquidity. the fsa is acting to remedy the situation, and the bank is in active discussion with fsa about how such regulation should best be implemented. more attention has been paid to the “ time - series ” dimension where there is now a clear international consensus among the members of the financial stability forum and the basel committee that some form of counter - cyclical prudential supervision is required. the principle has been established. to correct these types of market failure will require a system of regulation that effectively marries the “ top down ” assessment of the risks to the system as a whole to the “ bottom up ” supervision of individual institutions. the present system has not delivered that. a lot of detailed work needs to be done to convert these general principles into concrete implementation. how would the interaction between the “ cross - section ” and “ time - series ” risks be taken into account? would the framework take the form of an addition to capital requirements as a function of the degree of maturity mismatch, leverage or the rate at which the balance sheet was expanding? or would there be a limit on leverage ratios? how would leverage and maturity mismatch embedded in the assets side of the balance sheet be taken into account? and how would the framework be implemented for banks whose assets and liabilities span jurisdictions? can we define a group of institutions that are systemically significant? in the present crisis most institutions are deemed to be potentially systemic because of the impact of the failure of any of them on creditor confidence. if most banks appear systemic in a crisis won ’ t countries want to require foreign banks to be subsidiaries not branches? and, more fundamentally, should there be a glass - steagall type of provision to prevent retail deposits from being used to fund investment banking activities? there are good arguments in favour – to separate the utility functions of a retail bank taking household deposits and running the payments system from the casino trading of an investment bank, and good arguments against – the difficulty of maintaining a credible boundary between those institutions that are eligible to receive government support and those that are not. we need a public and informed debate on the merits of the arguments. we also should reflect on the fact that the belief that the authorities will step in when risks materialise encourages risk taking and means that risk - adjusted returns to financial activity are too high. the experience of unsustainably high returns in normal times interspersed by regular