mr stark discusses how the euro will change the world of finance opening speech by dr jurgen stark, deputy governor of the deutsche bundesbank, to the ferma ’ s risk management forum, held in berlin on 25 october 1999. * * * i. ladies and gentlemen, it gives me great pleasure to address this forum of european risk managers here in berlin today. with the introduction of the euro at the beginning of this year european financial markets have entered into a new era of rapid and profound change. the single currency will affect every segment of the financial services industry in the euro area in one way or another, although this impact and the pace of change will be different in various market sectors. the most rapid change has already taken place in the euro money market, which, within a matter of weeks after the launch of the single currency, developed into a wholly integrated transnational market, providing the very basis for the money market operations of the european system of central banks, the eurosystem. this was made possible by target, a system which allows large - volume payments on a real - time basis throughout the euro area and which, after a few technical difficulties at the start, is in full and smooth operation now. transnational payments within target reached a daily average of 350 billion euro in july this year. target thus ensures that cross - border arbitrage will eliminate short - term interest rate differentials. as a result, the eonia rate and national overnight rates have entirely converged. money markets have also adopted euribor as the single short - term benchmark in euro, to which the short - term futures market and the long term swap market are linked. transnational integration is a much more gradual process in capital markets. nevertheless, this process has already, within the first months of the new currency, acquired considerable momentum. in fact, the development of broad, deep and liquid capital markets covering the whole of the euro area is one of the great potentials of european monetary union. it is the elimination of exchange rate risk that is driving this process of market integration, the major feature of which has been a far - reaching convergence of long - term interest rates. this process started well before the launch of the euro, when markets gradually began to anticipate that emu would become a reality. as a result, interest rate differentials between 10 - year government bonds of euro member states have narrowed to a range that, usually, does not exceed 40 basis points these days. this is

incentive to run up debt. their idea was that a combination of market discipline and fiscal rules would keep budgetary policymaking on a sound basis. as you know, the maastricht treaty contains a no - bailout clause prohibiting member states from assuming each other ’ s debts. the treaty also bans monetary financing of government debt by the eurosystem. together, these safeguards aim to ensure that investors themselves – and not other parties such as the taxpayer – bear the risks of investing in government bonds. in addition, the stability and growth pact includes rules to restrict government debt and budget deficits. these aimed not only to ensure that public finances remain on a sustainable path, but also to create the buffers needed to allow budgets to fluctuate over the economic cycle and to enable member states to take countermeasures during economic crises without being forced to call for external aid to fend off looming overindebtedness. 3 / 9 bis central bankers'speeches these rules form the principle of national fiscal responsibility. this is the foundation of the maastricht framework. walter eucken, a founder of the freiburg school and pioneer of the social market economy, summed up this liability principle as follows : “ whoever reaps the benefits must also bear the liability. " and what goes for the economy goes for countries as well : decisions will only ever be taken responsibly if those who decide also bear responsibility for the consequences of their actions. thus, the maastricht treaty largely assigned the power to act and liability in matters of economic and fiscal policy to the member states. and yet, government debt in some euro area countries has risen significantly. one reason for this is the repeated breaches of the budgetary rules – even by germany, incidentally, at the very beginning of monetary union. capital markets, contrary to initial expectations, also did not punish these infractions by imposing higher risk premiums. the no - bailout clause, it seemed, lacked credibility. but another reason for the ballooning debt levels was undoubtedly the financial crisis, which forced euro area countries to shore up their banking systems. this was another reason why doubts emerged over the sustainability of some member states ’ debt in the subsequent sovereign debt crisis. rescue measures were swiftly rolled out to prevent the crisis from escalating. this episode showed that it might be wise for the euro area, too, to have a lender of last resort to support countries facing exceptional circumstances in order