right way to respond to the increasing volume and volatility of international capital flows, and especially attitudes to capital controls. many emerging economies point to the need for a policy mix that is tailored bis central bankers ’ speeches to their country ’ s specific economic and financial structures in order to protect internal price stability and financial stability against the consequences of large capital inflows and sudden stops. the range of measures deployed is correspondingly broad. some countries intervene on the foreign exchange markets, others resort to interest rate cuts in order to discourage capital inflows, another group focuses mainly on macroprudential measures in a bid to strengthen the ability of their domestic financial systems to absorb inflows, while yet other nations mainly or partly employ capital controls. this broad variety of national responses inevitably begs the question of whether and to what extent they are consistent with global financial stability. greater cooperation, for instance through a ( non - binding ) framework or guidelines both at the national and the global level, might be a more effective way of safeguarding financial stability. moreover, it has to be further clarified whether an incorporation of capital flow management into the surveillance mandate of the international monetary fund could contribute to better outcomes on the global level. as jaques de larosiere recently highlighted : an international monetary system worthy of the name should ensure that national interests and measures lead to globally stable solutions. in my view, this is much the same way that, in a market economy, the sum of individual decisions should add up to a rational macroeconomic whole. it is well known that germany is a firm proponent of a free movement of capital. this position is not anchored in its general belief in a market economy but also reflects its own past experience with capital controls. as an export nation, germany was particularly interested in rapidly achieving full convertibility of its own currency. it has completely liberalised its capital exports back in the early 1960s. however, it proved impossible to sustainably liberalise capital imports in the same way. operating within a fixed exchange rate regime, germany on several occasions imposed temporary restrictions on capital imports in response to large speculative capital inflows during the 1960s and early 1970s. this measures aim of assuring the effectiveness of the bundesbank ’ s monetary policy with its primary objective of safeguarding domestic price stability. several emerging market economies are currently in a comparable situation to that of germany in the 1960s and early 1970s, in particular in terms of the state of development of their financial markets. however, looking back at

conflict. whereas, given inflation, creditors make arbitrary and unearned gains, it is the recipients of transfer income and the owners of monetary assets who are the losers. i am thinking, in particular, of the small savers who wish to make additional provision for old age. given 3 % inflation over a period of ten years, their monetary assets lose no less than one quarter of their purchasing power, for example. thus, looked at over a longer period of time, attempts to moderate a high standard of stability are not at all worthwhile. internal stability is and remains the sole genuine seal of approval for a good currency. that is the sole basis on which confidence in the monetary system will grow, on which millions of efficient processes of exchange in the goods, factor and financial markets can be organised every day, and on which economic relationships that are sustainable in the long term can be established. for that reason, monetary stability is - and will remain - a perpetual challenge even in the age of moderate rates of inflation. iii that applies quite particularly with a view to european monetary union. if the euro is not given the stability seal of approval by the financial markets and the general public from the outset, the project of monetary union will be standing - economically and politically on feet of clay. but how can the euro be given stability from the start, apart from the future ecb pursuing a consistent and stability - oriented monetary policy? i wish to highlight three aspects. 1. fiscal policy in the participating countries must regain its room for manoeuvre. a glance at the public sector budgets in the majority of member states shows how narrow the financial scope has become everywhere following the many years of accumulating debt and the expansion of the public sector. the vicious circle of growing indebtedness and of ever - higher interest burdens pushes other tasks into the background and calls for higher and higher taxes and levies. that is especially the case in those countries with retirement provision and health care based on the “ pay as you go ” principle, and which are faced with considerable demographic challenges. in a large number of european countries, the government ratio and the taxes and social security ratio have now reached such orders of magnitude that they are threatening to strangle the economy ’ s power of innovation, and putting more and more jobs at risk. this process must be corrected if prospects for growth and employment are to be improved on a lasting basis. for that reason - irrespective of monetary union - sustained consolidation