jorg asmussen : the global crisis – lessons for international policy cooperation speech by mr jorg asmussen, member of the executive board of the european central bank, at the kiel institute for the world economy, kiel, 23 june 2013. * * * sehr geehrter herr ministerprasident, sehr geehrte frau oberburgermeisterin, sehr geehrter herr professor snower, dear laureates, meine damen und herren, it is my pleasure to be here today in kiel and warmly congratulate gro harlem brundtland, joseph stiglitz and mohammed ibrahim for winning the 2013 global economy prize. this prize has high reputation at the ecb where we believe that international cooperation and openness are crucial for improving people ’ s standards of living. some of you might recall that the prize was awarded in 2011 to former ecb president jean - claude trichet. i would like to focus my intervention today on some lessons that can be drawn from the global financial crisis for international policy cooperation. i will start with a question. does the crisis call for a substantial change in the approach to international policy cooperation? my answer is yes, for the following three reasons : first, the world has become more interconnected and shocks are transmitted more rapidly across countries. consider the following figures on global financial integration : total foreign assets and liabilities of advanced economies rose from 68 % of gdp in 1980 to almost 450 % of gdp in 2010. the synchronisation of a severe economic and financial downturn, after the failures of major financial institutions in 2008, is a stark reminder of the significant interdependence of our economies. in 2009, 40 out of the 50 largest economies in the world experienced severe recessions. second, we need a new approach to international cooperation because the potential sources of shocks have multiplied. alongside domestic shocks, countries are now more exposed than in the past to external financial shocks and global shocks to confidence. keeping one ’ s “ house in order ” is no longer sufficient to fully insulate domestic economies from these shocks. third, we need a new approach to international cooperation because the crisis has unveiled structural vulnerabilities in the global economy. in particular, our current institutions were designed for the economic system of the 20th century. they are not suitable for the global challenges of the 21st century. global economic cooperation is needed to design better institutions. for these three reasons, we have to take the crisis as a

conundrum ” by federal reserve chairman alan greenspan. persistently low long - term interest rates led to an aggressive search for yield and capital misallocations in the financial system. how the impact of domestic policies could spill over to other countries was not sufficiently appreciated. and the need for stronger international cooperation on this front was not recognised that much before the crisis either. in 2007 the imf attempted to broaden the focus of bilateral surveillance to the implications of domestic policies for external sustainability. the attempt failed because some countries resisted to having their exchange rates labelled as “ fundamentally misaligned ” and to adjust their policies accordingly. a forum for global economic governance tuned to the economic realities of the 21st century was missing. institutional frameworks to create sufficient peer pressure at the global level to prompt systemic players to act were weak. thus, global economic governance and multilateral surveillance were not fully equipped for the new challenges of a globalised world. but the crisis also revealed acute failures in the global financial system. while financial sectors became increasingly international, supervision and regulation remained largely national in scope and only loosely coordinated at the international level. this encouraged regulatory arbitrage, the creation of large, complex financial intermediaries, and poor risk management practises. several of these features also characterised our european continent. the crisis revealed fragilities in the governance, surveillance frameworks and financial architecture of the euro area. bis central bankers ’ speeches the rules and governance framework associated with the stability and growth pact were not sufficiently enforced and, therefore, respected. efforts to promote structural reforms, for example under the lisbon agenda, were weak. as we know now too well, macroeconomic imbalances within the euro area grew unabated. competitiveness developments across member states diverged to an unsustainable extent. for instance, a harmonised indicator of price competitiveness shows that between 2000 and 2008 germany became almost 20 % more competitive in real terms vis - a - vis the rest of the euro area average. over the same period, price competitiveness decreased by around 10 % in italy and spain vis - a - vis the euro area average. in addition, despite the unprecedented level of financial integration in the euro area, banking supervision remained domestic. cross - border resolution frameworks, in turn, did not reflect the increasing complexity and interconnectedness of the european banking system. overall, inappropriate policies in one country in the euro area could create negative externalities for other euro area countries, and possibly des