antonio fazio : finance and recovery in the world economy address by the mr antonio fazio, governor of the bank of italy, at the aiaf – assiom – atic – aciforex, trieste, 3 february 2001. * * * globally, the growth in the money supply and the value of financial assets reached a peak last spring. the nasdaq index has subsequently fallen by one half ; the s & p 500 index first stopped rising and then, in september, began to decline. the performance of technology shares in europe has been similar to that of the us market. all the european stock exchange indexes peaked towards the middle of 2000 ; they have followed a downward trend since the last few months of last year. at the beginning of 2000 equities in all the main industrial countries except japan appeared substantially overvalued in relation to the expected growth in earnings and the risk premium implicit in valuations. a year ago we called for a " virtuous " realignment of the financial market's valuation of firms with the performance of the real economy, to be achieved through robust economic growth. the increasing divergence in the second half of the nineties between stock market prices and the actual and expected expansion in output was due to the world money supply having grown faster than the economy and to the rise in the velocity of circulation of liquid balances owing to the rapid increase in financial derivatives. one of the features of the second half of the nineties was the pace of productivity gains in the united states deriving from the spread of new technologies ; producer prices and world commodity prices remained stable. the monetary policies of the leading central banks and the interventions of the international institutions had to cope with the succession of financial crises in mexico, asia, russia and latin america. the spread of these crises was averted ; the worst effects of exchange rate instability and bank failures were kept within limits. monetary policies and the expansion in the assets of the financial intermediaries active in international markets brought a steady decline in bond yields ; the excess of liquidity was reflected primarily in the rise in share prices. the abundance of funds and the ensuing large fall in the cost of capital fueled the prolonged expansion in us domestic demand and fostered the recovery in 1999 in output and investment in asia, europe and latin america. the recovery increased the demand for oil and energy products. from the middle of 2000 onwards the ensuing rise in the oil price caused consumption to slow down in the industrial and oil -

the single currency project. second, common supervision and a centralized resolution authority lay the basis for financial stability. banking union, together with other national and european policies – in particular, the monetary policy measures recently decided by the governing council of the ecb – is already contributing to the normalization in credit conditions for firms and households. the comprehensive assessment of the balance sheets of the largest euro area banks, which preceded the launch of the ( ssm ), enhanced transparency and dispelled doubts about the banks ’ resilience. further progress is expected as the ssm brings harmonization of supervisory and business practices, reducing investors ’ perception of risks. although complete normalization in credit conditions will likely require definitive exit from the crisis and a return to stable economic growth, signs of gradual improvement can already be discerned in the surveys conducted by the eurosystem and in other indicators. bis central bankers ’ speeches banking union has imparted a strong impulse to the efficiency of the financial system by fostering competition across euro area countries. consider for example the recent decree on the governance of the cooperative banks in italy. the initiative is the product of a good many years of reflection on the shortcomings of the cooperative structure for listed or very large banks ; at the same time, it can be read as part of a broader reform effort to bring the italian economy up to the best european standards of efficiency. 3. how to consolidate a promising start the important steps already taken need to be followed by further progress, on several fronts. since the list would be long, i shall mention just one general issue and two specific ones. the overarching issue : further progress towards european integration is essential. we should not forget that the current crisis was provoked, in part, precisely by lack of progress in european integration following the adoption of the single monetary policy. the bu project has gotten the process started again, helping to defuse the crisis. but we must not make the same mistake twice ; the integration process cannot be allowed to stall again. progress in this direction is particularly difficult at present, because national centrifugal forces seem strong. they are visible in various forms : growing support for anti - euro or euro - skeptical political parties in several countries, for one, and the difficulties encountered by european and eurozone institutions in discussing issues from an area - wide perspective, for another. national interests and perspectives are strong. take, for instance, the distinction between core and periphery, which has become standard in many