Axel A Weber: The global economic crisis and the challenges it poses
Introductory remarks by Professor Axel A Weber, President of the Deutsche Bundesbank, at
the Morning Plenary Session "The Global Economic Crisis" of the Israeli Presidential
Conference 2009, Jerusalem, 22 October 2009.
* * *
1 Introduction
Ladies and Gentlemen,
Mr Chairman
Thank you for the opportunity to speak to you here on the global economic crisis and the
challenges it poses. These issues can be discussed from very different angles, many of
which are equally interesting.
However, my perspective is that of a central banker within the Eurosystem and I will
therefore focus on the macroeconomic dimension of the two main topics raised in the
announcement to this plenary session. They are, broadly speaking, a stock-take of the
economic environment, including the short-term outlook, and the long-term implications of
the crisis for economic policy and the science of economics.
However, I would like to add another point which I regard as a linchpin between these two
areas. It is the question of how to get from the state we are currently in to a hopefully more
stable equilibrium, in which the lessons from the crisis have been learnt. The issues that
need to be discussed in this third, medium-term field are, in particular, exit strategies for the
various policy measures taken during the crisis. In my view, the way we tackle these
challenges in monetary policy, fiscal policy and at the level of the IMF will be at least as
important for future growth as the changes in the architecture of the financial system,
adjustments to monetary policy or improvements in economic theory. But let me start with the
state of the world economy.
2 Where does the global economy stand?
The financial crisis caused very serious disruptions on the financial markets after the
collapse of Lehman Brothers, and only far-reaching interventions by governments and
central banks worldwide prevented a collapse of the whole financial system. Despite this
coordinated action, we entered the deepest global recession since the Second World War.
However, after an economically devastating winter half year, we have seen a remarkable
stabilisation around the world in recent months. In the euro zone, the decline in GDP almost
came to a standstill in the second quarter, and a slight increase quarter-on-quarter is likely in
the third quarter. Germany even delivered a positive surprise in the second quarter, when
GDP grew by 0.3% on the quarter; the outlook for the third quarter is even better given a
rebound in industrial activity and the levelling-out of the de-stocking cycle.
•
There are several factors, in the euro zone as well as in other major economies, that
point to a fairly benign outlook and that make a double-dip recession very unlikely:
•
An important part of economic policy stimuli is still in the pipeline for 2010.
•
The improvement in confidence, not the least on the financial markets, is
increasingly being supported by hard facts. The task of monetary policy-makers has
become a little easier because deflationary fears as a result of the massive
correction on the commodities markets in combination with deteriorating economic
conditions have all but disappeared in recent months, while inflation risks are still
very limited or non-existent in the short run.
However, forecast risks are still elevated, and there is no reason to be overly optimistic given
the fragility of the recovery and the existence of important downside risks such as a
foreseeable deterioration in labour market conditions and the second-round effects that the
crisis is likely to have on bank balance sheets due to the recession. Although I expect a
global recovery across the major world regions by 2010, the pace of growth should be much
more moderate than in the past. In particular, it is not realistic to expect a speedy return to
pre-crisis trend levels of output.
On the financial markets, optimism seems to be even more widespread: Market conditions as
measured by stock prices, spreads and bond yields have improved significantly in recent
months, in fact even more so than the real economy, but the situation is still fragile and
temporary backlashes are likely. This is because the stabilisation is due not only to
betterthan-expected macroeconomic developments and a levelling-off of risk aversion, but also to
unprecedented stabilisation measures by governments and central banks, which cannot be
maintained forever.
In addition, banks are still exhibiting some weaknesses, and some risks to corporate
earnings are going to materialise over the coming months. This, combined with ongoing high
levels of uncertainty and volatility on financial markets, also make exuberant forecasts
inadvisable.
3 Lessons learnt and still to be learnt from the crisis
Still, it is safe to say that we have overcome the worst. This makes it all the more pressing to
reach an international agreement on the reforms to be implemented in the financial sector to
make the whole system more resilient to shocks and less prone to aberrations such as those
that led to the current crisis. The dire consequences of the crisis have created a sense of
urgency and a willingness to act that must now be put into action. We owe this to the public
given the immense cost the financial crisis has imposed on public finances and future
generations, who will have to bear part of this burden.
The financial crisis has demonstrated that banks remain the primary link between the
financial system and the real economy. While it is true that regulation and oversight have to
be extended to all systemically important financial institutions, better regulation of banks is
therefore an even more important building block in a stable financial system. For this reason,
it is essential to further improve banks' risk management and to review their capital and
liquidity requirements. My co-panelist Baron de Rothschild will probably elaborate on these
banking-related issues.
In addition, supervision has to be taken one step further if we want to fully address the
causes of the current financial crisis. It is not sufficient to safeguard the stability of each
individual bank; instead, systemic risk has to be identified and combated. And obviously
central banks must and will play an integral part in this macroprudential supervision.
What is important to note is that these and other problems, such as internationally
comparable accounting standards, can only be resolved at an international level. Fortunately,
the G20 have made a strong commitment to reaching such solutions. Now we must flesh out
the general agreement made in Pittsburgh with more detail. Specific implementation is often
very intricate and requires careful analysis, which is why the specialists - eg the Basel
Committee on Banking Supervision and regulators and legislators at the national level -
need time to formulate the new rules properly and to create a consistent framework.
Another lesson from the crisis is that global imbalances must be reduced in order to achieve
sustainable long-term growth. This has led some to propose a coordination of economic
policies, where countries with current account surpluses actively prop up demand.
To be frank, I am deeply sceptical about such a strategy. Even persistent current account
surpluses are not per se an indication of imbalances. They require careful analysis to
determine whether they merely constitute a market outcome, such as a high external saving
rate in an aging society, or are due to policy interventions eg on the foreign exchange
markets. As long as market adjustment mechanisms work, I am not concerned with
rebalancing the sources of growth. Instead of trying to manage global demand, efforts should
be concentrated on freeing up clogged adjustment channels. The euro area is certainly not at
the forefront of the debate on impediments to more balanced growth. This is not to say that
the necessary global adjustment process will not have repercussions on surplus countries
like Germany. But these processes - which are currently going on to a significant extent
(Germany alone will nearly halve its net exports by roughly 80 bn euros) -should also remain
market-driven. Fine tuning regional demand with pre-crisis global growth rates as a
benchmark will not prove successful in my view.
From a political economy perspective, it seems that the debate about reigning in imbalances
through more surveillance and policy coordination risks drawing political commitment away
from the efforts to reform financial markets I have just outlined. If this were to happen, we
would have cause to be truly concerned.
4 Imminent challenges: exit from the rescue measures
Finally, I would like to make a few comments on the question of exit strategies. Given the
macroeconomic outlook, there is surely no need to rush for the exit at the current juncture.
However, to stabilise expectations and to safeguard public confidence it is essential to
develop a credible exit framework now. The challenge in terms of communications will be to
make clear the difference between developing and implementing an exit framework.
As a central banker, I would like to stress first that maintaining price stability has always been
and will continue to be the primary objective of monetary policy in the Eurosystem. Hence,
the monetary policy stance is determined by risks to price stability, which are fortunately
currently not present at the policy relevant time horizon. Our non-standard instruments allow
a flexible exit which takes into account any remaining fragility on financial markets, if needed.
Therefore, I am fairly confident that monetary policy in the euro area will manage an orderly
exit.
Given the enormous rise in public deficits and the strain this will put on future budgets, the
fiscal exit strategy will have to kick in as soon as the recovery has firmed up, which means
no later than 2011. Reigning in deficits will require significant improvements in the structural
balance ratio. Within the European Monetary Union, the Stability and Growth Pact will play
an essential role in guiding fiscal consolidation. And even after correcting excessive deficits,
rapid consolidation will have to continue to reach medium-term budgetary objectives and to
substantially reduce debt ratios from their earlier extraordinarily high levels.
We must not forget that early and decisive consolidation is not an end in itself: It will help to
restore and maintain confidence in financial markets, recreate fiscal room for manoeuvre
before the next downswing and help to prepare budgets for the foreseeable fiscal burdens
associated with an aging population.
5 Conclusions
Given time restrictions, I will not raise the issue of exit strategies for the IMF or for
government involvement in the financial sector. We may discuss these in more detail
afterwards, so I will leave it at that for the moment. Thank you for your attention.