good news items about a company ’ s profits may lead investors to project the trend well into the future and accordingly generate an over - reaction ; if the share price then rises, this is seen as confirming the analysis. a period of good returns also boosts the investor ’ s self - confidence, making her / him bolder and more prone to take risks. bit by bit the over - reaction takes shape and, if the worst comes to the worst, leads to a bubble. the roots of sizeable speculative bubbles often lie in some popular theory that is seen as being supported by reliable figures or analyses. topical examples are such concepts as ‘ the new economy ’ or ‘ the new economic era ’. although they may be highly exaggerated or even completely wrong, socalled theories of this kind easily become conventional wisdom. as pointed out more than a century ago by the american psychologist william james, an important factor behind human behaviour is attention ; as also demonstrated by later psychological studies, we tend to direct our attention at whatever is attracting the attention of others. a major role in this process is frequently played by the media. it should be born in mind, however, that media operate in a highly competitive environment that makes it difficult for them to stand apart from the conventional wisdom. but media can both accentuate and modify the prevailing consensus. a phenomenon – also studied in experimental psychology – that works against taking an independent stance is group thinking. it is not easy to stick to an opinion that differs from what a majority of the group seems to hold ; “ surely all the others cannot be wrong ” is a common thought. people who go their own way are liable to be regarded as have - beens with little influence or significance. we are also liable to succumb to wishful thinking. supporters of a football club or a political party, for instance, are not infrequently over - confident about the chances of winning. another example with which you may be familiar is the reluctance to enter a restaurant that is empty ; people generally prefer one that has many guests – they simply rely on the judgement of others. in this way our inherent behaviour can generate both optimistic and pessimistic over - reactions. herd behaviour pulls share prices far beyond what is fundamentally warranted. if things go really wrong, the result may be a financial bubble that – just like any bubble – sooner or later bursts, with dramatic consequences. those with practical experience of financial markets will readily find themselves at home in this new

to the rules and regulations governing financial activities - and it is therefore in principle possible to influence them. the eu is now working on implementing a financial services action plan, which should be implemented by 2005. it includes 42 new or amended directives which have a bearing on the financial sector. disappearing exchange rate risks … it is easy to conclude that there has been a dramatic decline in interest rate spreads between the countries that have introduced the euro, in the region of from around 5 down to 0. 3 percentage points for government bonds. some of this decline is, of course, connected with the consolidation of government finances in the eu member states, but as long as the national currencies remained, investors often also demanded a premium for managing exchange rate risk. the remaining interest rate spread can be largely explained by different credit ratings of member states in the euro area, which are carrying different baggage weights from debt previously incurred, as well as by differences in liquidity between different bond issues. the introduction of the euro has also contributed to increasing the breadth and depth of european capital markets and in any case led to almost complete integration of the part of the money market trading that is closely connected with the eurosystem ’ s monetary policy transactions. to be sure, it is the quintessence of a common monetary policy that there should be uniform interest rate conditions for the liquidity supply across the entire monetary union. this has also led to an integration of deposit markets, i. e. short - term financing without formal collateral. … but remaining deficiencies in the infrastructure on the other hand, things have moved rather more slowly with regard to integration of cross - border money market trading against collateral. this is because it is more difficult to equate the value of these different types of collateral when they fall under different national legal systems. securities trading between different countries is on the whole made more difficult by the fact that the infrastructure has still not been adapted to making transactions between buyers and sellers in different countries as simply and cheaply as within individual countries. one of the most cited examples of obstacles to cross - border financial transactions is the cost of making payments from one country to another. now there is an ec regulation that prescribes that the price of making payments in euro between countries should not be higher than the same payments within a country, but the underlying infrastructure has involved de facto higher costs for making payments across borders. other examples of national differences concern provisions aimed at establishing good consumer protection, but which make it more