ewald nowotny : the global economy – challenges and prospects opening remarks by prof dr ewald nowotny, governor of the central bank of the republic of austria, at the annual meeting of czech ambassadors, vienna, 29 august 2011. * * * 1. the global economy – unbalanced and fragile recovery since the beginning of the global financial crisis, uncertainty about economic recovery and economic prospects in general has been elevated. what initially appeared to be an exceptionally rapid recovery after an exceptionally deep financial crisis turned out to be very fragile, unbalanced and globally uneven. unlike in periods after earlier crisis episodes, this time growth rates in industrial countries remained at moderate levels, unemployment rates ceased to decline further and private consumption remained hesitant. the need to consolidate fiscal balances in all industrial countries after rapid deterioration further dampened consumer and business confidence. in some cases, the weakness of the recovery was amplified by adverse shocks such as the fatal earthquake in japan. w orld financials stock index gross domestic product - real jan., 2007 = 100 in % p. a. budget balance % of nominal gdp - 2 - 4 - 2 - 6 - 4 - 8 - 6 - 10 - 12 - 8 sources : thomson reuters, european commission 2011. euro area u. s. a. japan many emerging markets, by contrast, struggled with an overheated economy and mounting inflation. massive capital inflows put upward pressure on the exchange rate and harbor the risk of sudden reversals. monetary and fiscal tightening as well as exchange rate interventions were initiated to cool demand, curb inflation and prevent the build - up of asset price bubbles, but the success of these measures has been only limited. in such an environment, adverse economic data and uncertainty about policy decisions can have severe effects on financial markets. with the protraction of negotiations about the lifting of the u. s. budget ceiling and the series of emergency meetings to solve the european debt crisis, market participants have become increasingly nervous. during the summer months, when markets are, in general, relatively dry and rely heavily on automatic stop - loss policies, adverse tendencies can easily become self - perpetuating. in such an environment, even good news bis central bankers ’ speeches about the successful settlement of the u. s. debt ceiling conflict and far - reaching decisions at the european level can bring only minor relief. real gdp growth in selected countries % - 2 u. s. a. euro area germany italy japan china brazil india russia czech rep.

of market tensions – a problem that will have to be solved at a completely different level. 2. five lessons to be learned from the global financial crisis the global financial crisis shares several characteristics with past crisis episodes. among these are the rapid financial market liberalization in the years prior to the crisis in combination with an insufficient regulatory framework, a build - up of asset price bubbles and the widening of global imbalances. an exceptionally long period of high growth and low inflation made financial market participants less aware of risks. all these factors promoted an unsustainable explosion of asset prices and private indebtedness. at the same time, the global financial crisis was in several respects unique and required policy reactions in uncharted waters. central bankers had to learn to expand their portfolio of policy instruments. in addition to cutting interest rate to historically low levels, central banks around the world provided ample liquidity at a higher frequency and with longer maturities to a larger group of financial institutions and against an extended list of collateral, agreed on foreign exchange swap lines and entered new territories by buying assets on secondary markets. a factor that was seriously underestimated was the global character of the crisis and the international linkages that go beyond trade links. this particular factor contributed to uncertainties about economic prospects and required an unseen level of international policy coordination. – a first lesson to be learned from the past crisis is the need to rewrite not only economic theory, but especially our forecasting and risk models. traditionally, these models omit many potentially important contagion channels such as the bis central bankers ’ speeches sudden reversal of capital flows or the correlation of business and consumer confidence across continents. at the same time, many historical patterns and regularities are still valid, but need to be reassessed in the light of the most recent experience. we should learn our lesson from history, being extremely careful with ex ante assessments that state – in the words of carmen reinhart and kenneth rogoff – that “ this time is different. ” a specific aspect that was underestimated was the impact of the global interlacement of the financial system. today, calamities of single financial institutions may quickly provoke a chain reaction and ultimately lead to a systemic crisis. this calls for the global coordination of supervisory activities. – the second lesson to be learned is thus that the health of a single financial institution is no sufficient condition for its immunity against contagion. microfinancial supervision, therefore, needs to be