be a clash between competition in bank lending and monetary stability. the past has taught us that it is important to adopt a fairly broad approach when developing tools to protect the stability of the financial system. in particular, we cannot discuss this topic without looking at the institutional framework. institutions matter. any discussion that ignores this is of little use to the real world. two issues are important. the first is, the design of the individual institution, and the second is the relationship between different institutions. let me focus on the second of these issues. the classical view of the relationship between institutions is to let each institution concentrate on its own task. for example, price stability would fall into the responsibility of the central bank, while the stability of the financial system would be the task of another government agency. separating tasks, it is argued, makes institutions more accountable and helps to limit agency problems. while there is much merit in this view, we have become aware that tasks often cannot be separated so clearly. let us recall the example of the central bank and financial supervision. under certain circumstances, there may be a short - term conflict of interest between price stability and financial stability. in some cases, low inflation may call for a cut in interest rates, while financial imbalances may warrant a rate hike. what should the central bank do? if you take the idea of separating responsibilities to the extreme, the central bank should simply cut interest rates and forget about the impact on the financial system, the protection of which would be the regulator ’ s job. few would consider such a policy optimal. the reason for this is that a conflict between price stability and financial stability is not necessarily an agency problem. instead, we may be faced with a short - term trade - off between price stability and financial stability. strictly separating these two tasks could thus lead to worse outcomes than coordinating the tasks between institutions. most non - europeans would stop here. in europe, we have to consider an additional factor : the geographical dimension. different institutions are subject to different jurisdictions. for example, prudential supervision is at the national level, monetary policy at the emu - 12 level, and the regulatory framework within which both supervision and monetary policy take place at the eu - 15 level. let me turn now to the relationship between monetary and fiscal policy. it is not too long ago that interest rates in many countries were set by the finance ministry. one of the reasons behind combining monetary and fiscal policy decisions in a single institution was the idea that this

framework is needed, and how can it be achieved? that is the question as to the political foundation. at the time, the werner group recommended, in answer to those questions and after a heated debate, that economic, political and monetary integration should be implemented in parallel, in various stages. at the end of each stage, the progress made in all three areas should be scrutinised with a view to deciding, in the light of the result of that scrutiny, whether the next stage could be inaugurated. in the final stage, not only the monetary policy responsibilities but also, in particular, key economic and fiscal policy powers should be transferred to the community. but it soon turned out in the ensuing negotiations that, above all, the political leadership in france at that time was not prepared to make any such a conceptual commitment. hence virtually all that was achieved was exchange - rate cooperation in the context of what later came to be known as the “ currency snake ”. the more far - reaching plans for a monetary union were largely shelved again. after a number of upheavals, the bretton woods system finally collapsed at the beginning of the seventies. that collapse was accompanied by the first sharp oil - price hike. after that, some considerable differences emerged in europe between the ways individual countries weighted their economic and monetary policy objectives. one group of countries relied on an expansionary monetary policy. they hoped that such a policy would help the economy to adjust quickly to the changed conditions. another group, by contrast, took advantage of the latitude that had been gained by the ending of the linkage to the dollar to regain monetary stability relatively swiftly. thus, france, italy and the united kingdom left what was known as the “ snake ” in the mid - seventies. only the “ little snake ” ( comprising the benelux currencies, the danish krone and the d - mark ) was left as a community of stability. it was not until 1978, on the joint initiative of french president giscard d ’ estaing and german chancellor helmut schmidt, that the subject of wider - ranging monetary cooperation in europe was taken up again. after long discussions in the countries themselves – some of them controversial – the european monetary system ( ems ) was set up in 1979, once more with the participation of france and italy. the crucial question in the negotiations had been, in particular, whether this ems would tend to gear itself to the best stability standard or only to the average level. in the