mario draghi : tension and new alliances – the currency wars speech by mr mario draghi, governor of the bank of italy and chairman of the financial stability board, at the “ les rencontres economiques d ’ aix - en - provence ”, session 2, “ tension and new alliances – the currency wars ”, aix - en - provence, 8 – 10 july 2011. * * * introduction the concept of “ currency war ”, coined by brazil ’ s finance minister guido mantega in september 2010, is indicative of the tensions that pervade the international landscape at the current juncture. indeed, in the past months, a number of countries have engaged in direct interventions in the foreign exchange markets or adopted some forms of capital controls. let me offer a few thoughts on these issues. if we look back at the developments in the international monetary system over the past 30 years, we see that among advanced economies the era of competitive devaluations has come to an end. by the end of the 1990s, a large body of research had emerged pointing out the conflict between intervention in foreign exchange markets and the commitment of monetary policy to price stability. in the united states, the doubts about the effectiveness of sterilized interventions prompted their abandonment some time after the mexican crisis. in europe, the adoption of a single currency put an end to the realignments that had characterized first the “ snake ” and then the first two stages of the european monetary union. currency interventions in these economies are now made only in case of excessively rapid and large fluctuations. in the years from 1981 to 1997 the federal reserve intervened 453 times, more than 30 interventions per year on average. in the last 12 years, in contrast, it has intervened only twice, on september 2000, when the euro had reached a record low against the dollar, and on 18 march this year, in the aftermath of the earthquake that hit japan. the european central bank has intervened only four additional times, in september and november 2000. japan has been somewhat more reluctant to abandon currency interventions, because of the continuing upward pressures on the yen in the face of a troubled slow - growing economy. yet, after 2004, it has intervened only twice, on september 2010 and this year in the days following the earthquake. the determination of exchange rates between the dollar, the euro and the yen has been thus left entirely to market forces. fluctuations have been large : over the past 20 years the ratio between the minimum and the

i do not expect it to occur in the foreseeable future. therefore, the principle of national liability needs to be underscored. otherwise, the deficit bias of member states of the euro area will be strengthened, which is harmful to the stability of the currency union. relying on fiscal rules alone will not suffice to overcome the euro area ’ s vulnerability to crises once and for all. on the contrary, additional steps are needed to strengthen the disciplining effect of capital markets on fiscal policy. in that sense, the principle of individual national responsibility ultimately means that governments, too, must be allowed to fail financially. 4. conclusion ladies and gentlemen recent events could create the impression of the euro area being stuck in a time loop – it is a bit like “ groundhog day ”, but less funny. nevertheless, it should be stressed that, in the past six years, we have made considerable headway in resolving the crisis and in putting the euro area back on a solid footing. we have achieved a great deal but much still remains to be done – both at the national and at the european level. if we are to overcome the multiple challenges that lay ahead, all the member states of the euro area will need to work together in a spirit of cooperation and demonstrate a firm commitment to the common currency. on that basis, i am confident that the euro area will remain a stable and prosperous economy. thank you for your attention. bis central bankers ’ speeches