Eurasia: Bull Meets Tiger – Panel III – Financial Markets: Shared Responsibility
Speech by Jean-Claude Trichet, President of the ECB
Frankfurt European Banking Congress
Frankfurt, 18 November 2005
It is a great pleasure for me to attend this European Banking Congress and to take part in this panel discussion on financial markets together with such a prominent group of speakers.
The title of the panel, “Shared Responsibility”, is particularly apt, given the reality of today’s world economy, where the long-standing process of economic and financial integration requires policy-makers to share responsibility in order to ensure that the benefits of integration are spread evenly across the globe and that the inevitable adjustment costs are properly addressed. To take on this responsibility, the international community needs firm governance. This requires solid institutional foundations and policies, which we often refer to as the “international financial architecture”.
The series of financial crises that marked, in particular, the period 1994-2002 led the international community to recognise the need to strengthen financial architecture as a core priority.
I was myself the witness of this major structural change in the global financial architecture at the end of the 90’s and beginning of the years 2000. I see four main principles at work:
- first, the full recognition that all economies, whether industrialised or emerging, that have a systemic economic and financial influence at a global level must be part of the informal exchange of views and of the new processes of global governance ;
- second, the full recognition that many improvements in global governance must rely upon the dissemination not only of appropriate prudential rules to be enforced by surveillance authorities but also of voluntary standards and codes to be adopted by economic agents of the private sector ;
- third, the understanding that any improvement of the institutional framework, whether in the domain of banking supervision in particular, and of insurance or securities sectors prudential surveillance, as well as in the domain of the conditionality of International Financial Institutions, has to take account of the optimal governance of the global integrated economic and financial system that we have been progressively developing;
- and fourth, the idea that in the present world where globalisation and scientific and technological changes are triggering very rapid changes, not only the quality but also the speed of the decision making process at a global level is essential.
These four principles have inspired all major changes that have recently been introduced in the global financial architecture: the creation of the G20, the working out of global standards and codes, the creation of the Financial Stability Forum, the frequency of the Global Economy meetings at the level of Central Bankers, the strengthening of links between all responsible entities, the improvement in the IMF surveillance, the changes in the monitoring by International Financial Institutions.
One of the most important consensus that has developed thanks to the work of these new formal and informal processes and entities has been the necessity to improve transparency. Let me now elaborate on this aspect – i.e. transparency - to which I attach particular importance. One of the weaknesses identified during the financial crises of the 1990s was that there had been considerable information asymetries between local authorities, market participants and the international financial institutions. Since then, the IMF has made considerable progress towards increased transparency and now publishes very valuable information on, for example, internationally agreed standards and codes. The ability of investors to assess information on the adherence of countries and their financial institutions to standards and codes facilitates risk management and leads to enhanced market discipline. As a result, yield spreads show investors’ greater ability to distinguish between assets with different risk/return characteristics. This does not, of course, mean that there is no more room for improvement. For instance, further progress still needs to be made with regard to the way in which countries report information to the IMF on official foreign exchange reserves. This is all the more important at a time when reserves have been building up at an unprecedented pace since 2002.
Improvements in the area of transparency have not been limited to the public sector. Market participants have themselves also adopted a pragmatic, voluntary and market-based approach in developing a transparent code of conduct. This work has produced significant results, the most important of which is the finalisation of the “Principles for stable capital flows and fair debt restructuring in emerging markets”. This initiative has already gained support, for example, from the G20 group, which stated one year ago that the Principles provide a good basis for strengthening crisis prevention and enhancing the predictability of crisis management.
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While all these new initiatives have significantly contributed to the strengthening of the international financial architecture, I should emphasise that in a constantly changing world we have to remain alert and ready to adapt our institutions and policies.
In this respect, Rodrigo de Rato has recently taken a very important step with regard to the IMF’s medium-term strategy, i.e. the definition of the Fund’s priorities in the years to come. I broadly share the vision of the Managing Director, who has outlined the new challenges that IMF member countries are facing in an increasingly globalised world.
In this context, I would like to highlight one area of the IMF strategic review which, from my perspective, is also one of the most important: macroeconomic surveillance. The IMF is well placed to conduct surveillance, including the monitoring of the spillover effects arising from the ever-growing trade and financial linkages between its member countries. Even though the list of objectives pursued by IMF surveillance has expanded over time, the IMF’s primary goal – which coincides with its original mandate – is to look after the international monetary and financial system and promote its stability. And I do believe that the current global imbalances have reinforced the case for this primary goal to be at the forefront of the Fund’s work. I therefore support the recent efforts made by the IMF to place more emphasis on global surveillance.
We are in a situation where the global economy is expanding at a comfortable pace but, at the same time, we face external imbalances which have been significantly widening in certain core economies since 2002. These imbalances represent a downside risk to the global economy, but the international community fortunately shares the diagnosis of the situation as illustrated, for example, by the G7 statements I have been signing in recent years. We have repeatedly called for action to address global imbalances and have agreed on homework that each of us should embark on. In practice this means a number of measures to increase the savings rate in the United States, structural reforms aimed at enhancing growth potential and market resilience here in Europe and in Japan, and increase domestic investment and/or consumer spending in the economies characterised by persistent current account surpluses (which now also includes most oil-exporting countries). Moreover, exchange rate flexibility is desirable for major emerging market countries and regions that lack such flexibility, as this would contribute to a better functioning of the global economy and would help, in particular, to limit any further build-up of global financial imbalances. The exchange rate reforms introduced by the Chinese and Malaysian authorities in July 2005 are, in this respect, a welcome step towards greater exchange rate flexibility in the East Asian region.
But it is not enough for us to agree on the diagnosis of global imbalances and the initial measures to be taken to facilitate their adjustment. We all have to step up our efforts to further execute the agreed measures. I therefore call for the resolute implementation of these measures by all partners involved, and for the IMF to further strengthen its supporting role in monitoring such implementation.
I am pleased to observe that this analysis of the main challenges for the global economy is shared by our Asian friends. This was confirmed – just last week, here in Frankfurt – by our discussions during the second high-level seminar bringing together the central banks of the Asia-Pacific region and the euro area, an event now taking place once a year in order to foster policy dialogue between these two important regions of the world.
Besides reviewing recent macroeconomic and financial developments and discussing the related policy issues, we also focused on the experiences of the EU and Asia-Pacific countries with regard to surveillance conducted at the regional level. It was not by chance that we dealt with this topic: our regions are in fact the two most economically integrated in the world, as is shown, for instance, by the relative importance of intra-regional trade.
The experiences of Europe and the Asia-Pacific region with regard to regional surveillance present some important differences, but also similarities. Beginning with the differences, it is true that we Europeans started in the 1960s with simple peer reviews, as is currently the case within the Asia-Pacific region; but we then made substantial progress, with fully fledged and binding surveillance of economic policies now enshrined in Europe’s economic and monetary constitution – the Maastricht Treaty of 1992. Moreover, while the European experience was mainly driven by public initiatives and supranational institutions, the main drivers in the Asia-Pacific region are market forces and the need to integrate into the global economy, as illustrated by the development of a regional production line for world markets.
Despite these differences, policy-makers in Europe and the Asia-Pacific region do agree that regional surveillance is an instrument that can usefully complement IMF surveillance, but should by no means replace it. We also agree that these two dimensions of surveillance can usefully interact to deliver stability in the global economy, but at the same time we acknowledge that more work needs to be done to harmonise them properly.
Thank you for your attention.