jurgen stark : cyclical and architectural issues of the international economy keynote speech by dr jurgen stark, vice - president of the deutsche bundesbank, at the conference on the international financial architecture organised jointly by the deutsche bundesbank and the american council on germany, frankfurt, 6 september 2002. * * * dear colleagues and friends, ladies and gentlemen, allow me first to join the previous speakers in extending a very warm welcome to all of you. i am glad to see how many managers and first - rate experts from the financial community as well as academics and others have found the time to attend this conference. our subject today is the international financial architecture, including the state of the global economy and its interaction with exchange rate developments among the key currencies. we will thus have an opportunity to discuss some of the current major problems confronting the world economy. when initiating this conference at the beginning of the year, my friends from the american council on germany and i did not anticipate that, in the meantime, the economic and financial problems globally would become even more pronounced than they were at the time. in addition to disappointing economic growth in the industrial countries, we are facing a series of further financial crises in emerging market economies. uruguay and brazil have added to the list of ongoing debt problems. in this disturbing setting, a revival of stronger growth in the industrial countries and improvements in the functioning of the international financial system are of critical relevance for enhancing the living standards of the populations around the globe. i trust that this conference will make us see the existing challenges a little more clearly and that it will shed some light on how best to resolve the most pressing issues. in my keynote address, i would first like to discuss recent developments in the world economy before touching upon matters of crisis prevention and crisis management. i am looking forward to an interesting debate by the panellists, both among themselves and with the audience, about many of the issues which i shall try to identify. i. the state of the world economy even though recent news about the world economy has not been exactly cheerful, let me start on a positive note. judging by the data now available, the world economy remains on the road to recovery. growth in the usa, in the euro area, in the accession countries and in emerging east asia is positive at present, and there are good prospects that the upswing will become stronger. we should remember that the fundamentals in most of these countries are supportive. the combination of low inflation and low interest rates

pace as in 2001 and may even grow a bit more strongly next year. the generally positive development in asian and european emerging markets stands in stark contrast to recent events in latin america. in argentina the economy will contract by more than 10 % this year and the social situation is still deteriorating dramatically. the situation in brazil remains of particular concern, even after the announcement of a new imf package. equally worrisome is the situation in uruguay and a number of other latin american countries. only chile and mexico appear to be relatively unscathed by the turmoil in the region. ii. strengthening crisis prevention recent developments in emerging market countries have made it clear that financial contagion emanating from crises in other emerging markets is much less of an issue today than it was a few years ago. neither the turkish crisis nor the argentine default have sent out shock waves comparable to those of the mexican crisis of 1995 or the russian crisis of 1998. the spreads of countries in east asia and central europe have scarcely been affected by the current events. creditors and investors have apparently learned to discriminate better between individual borrowers. this change reflects, on the one hand, better information on country conditions and, on the other hand, a better risk assessment. it also reflects better macroeconomic policies and the implementation of internationally agreed standards and codes. however, we have no reasons for complacency. even if sell - offs of emerging market debt as an asset class no longer appear to be institutional investors ’ preferred response to a crisis, the impact of other forms of contagion should not be underrated. this can still be observed in latin america. of course, the sharp contraction of the argentine economy has real spill - overs for its most important trading partners in the region. an additional transmission channel of the argentine crisis was the run by argentine citizens - as well as by residents of uruguay - on their dollar accounts with banks in uruguay after bank accounts in argentina had been frozen. in the process, uruguay quickly ended up with a dollar shortage and thus faced the risk of its banking system breaking down. permitting the dollarisation of the banking system without ensuring that a commensurate amount of dollar liquidity would remain available in the financial system made uruguay, not least, a victim of its own regulatory and supervisory weaknesses. when the argentine currency - board regime was abandoned, contagion effects also resulted from the government ’ s decision that the banks ’ dollar liabilities had to be converted into peso at a much