frank elderson : forests and finance panel contribution by mr frank elderson, member of the executive board of the european central bank, at cop26 world leaders ’ summit presidency event on “ action on forest and land use ”, frankfurt am main, 2 november 2021. * * * the challenges addressed here today are of vital importance to the network of central banks and supervisors for greening the financial system ( ngfs ). since its foundation in 2017, the ngfs has grown with lightning speed from eight to almost 100 members today. our membership encompasses central banks and supervisors from developing, emerging and developed economies. covering five continents, ranging from the biggest economies to the smallest island states – none immune from storms, fires, floods and deforestation. the bad news is that until a few years ago, climate change and environmental degradation were all but blind spots for the financial sector. the good news is that this is no longer so. the work of the ngfs has decisively contributed to the insight that climate and environmental risks are a source of financial risk, bringing them squarely within the mandates of central banks and supervisors. and to the understanding that the financial sector needs to be part of the solution to the ongoing climate and environmental crises. with our large and committed membership, our leverage on the financial sector can hardly be overestimated. together we supervise all global systemically relevant banks and over two - thirds of systemically relevant insurers. together we cover 88 % of the global economy and 85 % of all global emissions. at the ngfs we have been working hard over the past four years to integrate climate - related and environmental risks into the work of central banks and supervisors. we published a guide recommending that supervisors clarify their expectations that banks and insurers should revisit their very dna to address climate - related and environmental risks. in addition, the ngfs has developed forward - looking scenarios, identified data gaps and assessed how climate change is relevant for monetary policy. through these activities, clear light has been shone on the relevance of climate change for the financial sector. concrete tools have been developed and significant progress has been made. however, forests – and more broadly, nature – have so far remained too much in the shadows. recognising the harm that nature - blind financial flows may cause, and that climate change and environmental degradation are very much related, last month the ngfs published a study on biodiversity and financial stability. we – and the financial institutions we supervise – need to

question is less consequential than the first one. the root causes of the crisis the prevailing crisis narrative beginning with the first perspective on the causes, the oldest narrative of the crisis, progressively corrected by academics but still popular with some segments of public opinion, goes more or less like this : there was essentially nothing wrong with the initial design of emu, and the crisis resulted mostly from the fact that several peripheral countries did not respect that design – in particular the fiscal rules of the stability and growth pact – which generated the sovereign debt crisis. this is the “ it was mostly fiscal ” narrative, which can be bis central bankers ’ speeches easily connected to two of the others : fiscal indiscipline led to economic overheating, wage and price increases implied loss of competitiveness, and this then led to the balance of payment crises. although this is an internally coherent narrative, it is not correct, especially as a main driver of the crisis. first, there is no strong correlation between whether a member state respected or not the stability and growth pact before the crisis, and the yields being demanded by financial markets today. for instance, germany and france did not respect the pact in 2003 – 4 ; spain and ireland respected it more or less fully until 2007. second, there was no uniform increase in overall government debt during the first years of the common currency in the countries that are now under sovereign stress. [ slide 1 : evolution of public and private debt ratios ] in fact, in a number of those it declined, and in some of them it declined substantially. for instance, from 1999 – 2007, public debt in spain declined from 62. 4 % of gdp to 36. 3 % of gdp. in ireland, over the same period, public debt fell from 47. 0 % of gdp to 25. 0 % of gdp. while at relatively high levels, public debt also went down in italy ( from 113. 0 % of gdp to 103. 3 % of gdp ) and increased only slightly in greece. however, in the latter two cases, debt levels were still indeed far above the 60 % stipulated in the stability and growth pact. bringing the banking sector back in i submit that, to have a more accurate narrative for the causes of the crisis, we have to look beyond fiscal policies alone : imbalances originated mostly from rising private sector expenditures, which were in turn financed by the banking sectors of the lending and borrowing countries. as slide 1 shows, contrary to public debt levels