andreas dombret : holistic approaches to solve the “ euro crisis ” speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the global economic symposium, kiel, 1 october 2013. * * * ladies and gentlemen, thank you for the invitation to this year ’ s global economic symposium ; it is a pleasure to be here. the “ euro crisis ” has certainly been, and it still is, a defining moment in the history of european monetary union – though i would add that we are dealing with a sovereign debt crisis rather than a crisis of the euro. let me kick off the discussion by offering some thoughts on how to solve the crisis. what we need is a holistic approach. since the european monetary union is a highly interdependent system, any solution must not only remedy the problem at hand but also improve the working of the system as a whole. unfortunately, many of the proposed solutions fall short of this requirement. instead, they are prone to what is known as the “ cobra effect ”. the cobra anecdote is set in colonial india. trying to stop a plague of cobras, the british government offered a bounty for every dead snake. the plan seemed to be working at first. high numbers of dead cobras were presented to the colonial administration. unfortunately, this did not get the plague under control. most of the dead cobras were not wild ones – they had been bred by enterprising locals in order to claim the bounty. when the governor finally caught wind of the practice, he scrapped the reward, causing the cobra breeders to set the now worthless snakes free. as a result, the plague was worse than ever. every policy not only addresses a problem, but changes the nature of the game as well. this has to be taken into account when evaluating the overall merit of any measure. and when we look beyond instant effects, many policies lose their lustre. eurobonds are a case in point. granted, eurobonds would offer temporary relief to heavily indebted member states of the euro area. but the introduction of eurobonds would distort the already lopsided balance between liability and control even further. while spending decisions would essentially remain a national prerogative, liability would become european. incentives to incur further debt would thus be strengthened, not weakened. this would strain rather than smooth the working of the system. only if common liability were matched by common control would incentives be

measures implemented to strengthen domestic frameworks. these include wide ranging measures to develop regional financial markets, to improve liquidity management across borders, to strengthen cooperation networks for the supervision of regionally - active financial institutions and to establish regional infrastructure to enhance the efficiency and lower the risks associated with cross - border payments and settlements. regional arrangements between central banks and supervisory authorities have also been significantly strengthened to actively share information on emerging risks to regional stability and where necessary to coordinate regional responses. an important part of this includes the ongoing work to enhance the frameworks for crisis management including the orderly resolution of financial institutions with significant cross - border operations. within the asean region, measures are currently being pursued to promote greater consistency in the adoption of regulatory and supervisory standards in anticipation of a larger role for asean banks in driving regional integration as part of the broader agenda to realise an asean economic community by 2015. collectively, these arrangements aim to ensure that the expansion of bis central bankers ’ speeches cross - border financial linkages takes place within a framework and process that adequately mitigates systemic risk across borders. fifth, central banks and regulatory authorities in most emerging economies in asia have the broader mandate that includes a focus on the development of the financial sector as a means not only to enhance the growth and development potential, but also to reinforce a strong foundation for financial stability. in malaysia, the development and reform of the financial sector in the decade that followed the asian financial crisis has not only developed the financial sector to better serve the malaysian economy, but it has also better positioned financial institutions to withstand the destabilising episodes emanating from external shocks. this has included strengthening financial intermediaries, not only in terms of scale but also in their financial positions, risk management and governance practices. this has contributed to more efficient financial intermediation while improving access to financing, particularly for small and medium scale businesses. efforts to develop a vibrant capital market have meanwhile opened up alternative channels for financing, while mitigating concentration risk in the financial system and enhancing its ability to absorb large and volatile cross - border capital flows. these factors will place asia on a firm foundation to achieve its growth and development goals. while public policy clearly has an important role, it is as important for the financial industry to align itself with the desired outcomes of sustainable growth within a longer term horizon. this will involve a number of important considerations for financial institutions, including the rethinking of business models in the light of a re - assessment of risk and return expectations