the most productive areas of the united states. similarly, if national labor markets in europe become more flexible and efficient in the presence of a common currency and firms learn to count only on their own resources - - with no help from an occasional exchange rate adjustment - - european capital and labor markets may themselves become more integrated. and if greater integration of labor markets can only proceed slowly - - given persistent and unavoidable cultural and language differences - - this need not be the case for financial markets, where the disappearance of exchange rate risk will cause capital to move in response to interest rate differentials of only a very few percentage points. in this context, i would like to make clear that i do not view as ideal the u. s. model where the burden of recessions tends to fall heavily on the shoulders of workers, who may be obliged to move across regions and industries in response to the business cycle. how to deal with the reality of the business cycle is an area where europe - - with its tradition of social safety nets - - and the united states - - with its tradition of flexible work arrangements - - can perhaps learn something from each other. to date, neither of us seems yet to have found the optimal way to cope with the unavoidable reality of the business cycle to enable us to avoid both high unemployment rates and too skewed a distribution of income. my last general observation about the implications of emu for the united states has to do with the dramatic changes in macroeconomic policies that will accompany the creation of monetary union in europe. naturally, the main change will concern monetary policy, and it is in this area that the similarities between europe and the united states will ultimately be the greatest. the first similarity is that, with emu, the formulation of monetary policy in both europe and the united states will be highly centralized and the european central bank will enjoy, as the federal reserve does, a considerable degree of independence. these institutional features will reduce the scope for national governments to bend monetary policy to the needs of their country ’ s business cycle and will help keep the focus of the european central bank on the objective of price stability. the second similarity we may expect to see between europe and the united states is that, with emu, external considerations - - such as the trade balance or the value of the exchange rate - - will over time impinge less and less on the conduct of monetary policy, as now is the case in the united states. once monetary union is

default are important for addressing the risks inherent in a market where the value of derivatives substantially exceeded the value of the underlying instruments. we are encouraged by the progress made to date, and will continue to encourage further improvements. second, we believe that the major dealers, as well as the large commercial and investment banks, should take a cold, hard look at financing conditions and margin practice, particularly with respect to hedge fund counterparties and in otc derivatives. the reports issued by the counterparty risk management policy groups i and ii both make the important observation that the financial system is likely to be more resilient under conditions of stress when counterparties set initial margins at levels that are likely to be sustainable in less benign conditions. when margin levels are set more conservatively, firms are likely to have more flexibility in responding to stress and are less likely to take action that might amplify the market shock and exacerbate the reduction in liquidity. when competitive pressure drives margins down, markets may be less resilient. third, we believe the major financial institutions need to continue to improve their capacity to measure their exposure to risk in a less benign market and economic environment. the discipline of stress testing and scenario analysis that is designed to measure tail risk is at the frontier of this challenge. senior management and boards of directors need to understand the limitations and uncertainty that pervade the tools we use to assess these risks, to try to better understand the potential scale of losses the firm may face, and to carefully examine how well risk exposures reflect the overall risk appetite of the firm, and the size of the capital and liquidity cushion maintained in relation to those exposures. let me conclude by reiterating the fundamental view that the wave of innovation underway in credit derivatives offers substantial benefits to both the efficiency and stability of our financial system. the extent of these benefits will depend, in part, on the degree to which market participants can keep up with the pace of change in the market through continued investment in both risk management and in the processing infrastructure. we have been through a period of relatively favorable financial conditions, and the prospect for future stability will depend in part on the degree of care and conservatism market participants bring today to judgments about opportunity and risk management. thank you.