While there is a general consensus that fiscal consolidation and structural adjustment are necessary to regain competitiveness and sustainable growth in the future, in the immediate term it will involve costs to the economy. As the experience in previous crises has shown, including during the Asian Financial Crisis, there are threshold levels that when breached the economy will be pushed into an even deeper recession. This will in turn increase the cost of the resolution of the crisis and result in an even more prolonged period of weakness. The concern is also the potential huge financial and social costs. The Asian experience during the financial crisis in the late 1990s has also shown that the potential for effective results is enhanced when the policy package is comprehensive. BIS central bankers’ speeches  1  Financial restructuring and repair, fiscal consolidation and structural adjustments have their best chance to yield results in an environment in which there is some economic growth. Piecemeal policy measures that primarily focus on addressing the immediate problems will be inadequate and will not be able to garner sufficient growth momentum and thus sustain confidence. The financial restructuring and repair, the fiscal consolidation and structural adjustment urgently needs to be complemented with wide-ranging pro-growth policies. Another challenge confronting the world economy lies in the manner in which policy coordination may be improved, both within and across borders, to maximise the impact of policy measures while minimising the unintended spillovers on other parts of the economy or financial system and across borders.

This can’t be seen as an anomaly. If anything, it remains counterintuitive that net capital flows are still going “uphill” from emerging to developed economies. That means that some of the poorest citizens of the world are lending money to some of the richest, allowing those to finance their consumption. The same holds true for commodities prices. Commodities markets increasingly function like asset markets with the development of financial instruments based on commodities baskets. In fact, commodities have become an asset class in themselves which warrants special attention in terms of financial stability. On the other hand, there may be good reasons to think that “fundamentals”, such as strong growth in commodity intensive emerging economies countries underpin the current behavior of many commodity markets. Finally, financial volatility may be the product of some very specific features of the current environment. The conjunction of economic uncertainty, high risk aversion and ample liquidity worldwide is especially conducive to abrupt shifts in sentiment and portfolio allocations. Volatility becomes a problem when it is policy induced and, therefore, financial markets contribute to aggravating shocks instead of attenuating them. Then, durable instability settles in and creates potential threats for the real economy. We may be in such a situation today as there are doubts about the mutual consistency in economic strategies pursued by major economies. At the same time, some of the policies implemented to deal with volatility may cause additional damages and distortions in capital markets. I will address those two issues before turning briefly to longer term challenges.