risks. the increased supply is deemed to have caused a fall in the price, and hence in the volatility, of options, which has spread to the cash markets. in such a situation, a return to normal levels of volatility could bring substantial losses. in the emerging countries, after the rise in risk premiums that occurred in the spring as a consequence of expectations of an imminent increase in us interest rates, financial conditions have become easier everywhere ; the recovery in exports has been a contributory factor. the low cost of financing has encouraged numerous emerging countries to bring forward bond issues and increase their amount. in the first half of 2004 the value of the gross issues of the emerging countries as a group was two thirds of the historically high value of nearly $ 100 billion recorded in the whole of 2003. 3. economic developments in the euro area and ltaly the upturn in economic activity in the euro area has not been as buoyant as in the rest of the world. in the fast half of this year gdp expanded at an annual rate of 2. 3 per cent. between the first and second quarters there was a slight slowdown. growth was sustained chiefly by household spending. consumption expanded substantially in france ; in germany it continued to contract. investment continued at a modest level, growing at an annual rate of 0. 7 per cent. a pronounced acceleration in france contrasted with continuing contraction in germany, once again determined by investment in construction. the area ’ s exports accelerated to an annual growth rate of 7 per cent in the first six months of the year, fueled by the powerful expansion of world trade and the stabilization of the effective exchange rate of the euro. this result reflects the good performance of german exports, which are highly competitive even at current exchange rates. the stimulus to economic activity was blunted by the substantial increase in imports. the contribution of net exports to gdp growth was negative in both france and italy. italian economic growth picked up slightly in the first halt but remained significantly below the area average. italian gdp growth followed the area - wide trend in decelerating between the first and second quarters. the main impediment to italian economic growth is weak export performance. after diminishing in the first quarter, foreign sales increased appreciably in the second ; growth apparently continued in the third quarter, albeit at a slower pace. for the year, export growth is projected to be much less than the growth in world trade ; italy ’ s share of the world market

policies that led to unsustainable imbalances at the global level in the recent past. these are difficult problems, but the time has now come, perhaps, to have a fresh look at what are the possible technical solutions. i do not think that the “ old bretton woods ” can offer a viable arrangement for the 21st century : fixed exchange rates are gone. and yet one must admit that freely floating exchange rates have not really helped the adjustment of global imbalances. perhaps this is because currencies have now become financial assets that are traded for profit motives with little or no relation to the economic situation or the balance of payments of the issuing country : the exchange rate has thus become more part of the problem than of the solution. from this point of view it would appear more logical to look again at anchors based on a system of target zones for key currencies or to a substitution account that would replace national reserve currencies with the sdr, which i presume is still alive somewhere. but although logical, a revival of these proposals seems hardly promising for reasons that are perhaps more ideological than practical but that are still strongly held. realistically, the only anchor that one can think of today is an institutional anchor, i. e. an anchor based on institutions endowed with effective multilateral surveillance powers. this, again, is easier said than done. willem buiter, with his typical bluntness recently wrote : ” don ’ t waste time on multilateral surveillance. the imf will never have any influence on large member states with strong government budgetary positions and strong external positions ”. 8 this is a valid point and indeed so far imf surveillance has not been very effective despite various attempts to strengthen it. yet, in my view, a further effort by the international community in this direction is needed. as i argue in my book, the imf, drawing also from the expertise of the fsf and other relevant international institutions and standard - setting bodies, must be entrusted with the task of identifying unsustainable trends in payment imbalances, credit flows, asset prices, exchange rates, and of formulating specific policy advice to the relevant member countries to promote monetary and financial stability. this is an area where additional research is required and where the imf could supplement the analytical work conducted by the bank for international settlements and in the central banks ’ community. monetary policies and regulatory measures should be designed to complement each other in the context of a “ macro prude