jaime caruana : the impact of geopolitical events on the world economy speech by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the international securities market association annual general meeting, madrid, 27 june 2003. * * * it is a great pleasure for me to participate today in this international securities market association annual general meeting. i would like to thank the organisers for their kind invitation to open this meeting and also to welcome you all to madrid. the matters to be addressed in the conference are not only highly topical, but are of crucial importance for all of us. given the prestige of those who will be offering their opinions, i believe it will be a great opportunity to draw conclusions of enormous interest. the broad theme for this conference is the impact of geopolitical events on the world economy. by way of introduction, let me briefly share with you some thoughts on this topic. the world economy has been through a complicated period in recent years. the expected recovery has been slow, hesitant and disappointing. several factors have come into play in this connection. on one hand, the persistent impact of the bursting of the it and stock exchange bubbles has had a negative effect on business and consumer confidence as well as on investment. on the other hand, several shocks have further undermined confidence, among which i would highlight september 11, geopolitical tensions - in particular the conflicts in afghanistan and iraq - and corporate scandals. all this has created an environment of uncertainty over world economic prospects and has led to heightened risk aversion. finally, crises have continued to beset certain emerging market economies, such as argentina and turkey. both the real sector and certain segments of the financial sector have been affected by this series of shocks. equity markets have suffered a protracted depression worldwide. the fall in stock prices has fed back into aggregate demand, although in many countries this negative wealth effect has been offset, at least partially, by a buoyant home market. as usual, one can see the bottle as being half - empty or half - full : admittedly, the recovery is proving mild, but it is also true that this is partly a result of the mildness of the previous recession and that a deep recession has been avoided. conditions for higher global growth in the second half of this year seem to be in place and prospects for 2003 point to world gdp growth of between 3 % and 3. 5 %, slightly above that for 2002

considerably. and the spread widening in the euro area was uneven : countries that started from weaker fiscal positions, with higher debt levels, and those most affected by the first wave of the pandemic witnessed a much more pronounced increase in their financing costs. this cross - country financial fragmentation hindered the transmission of the single monetary policy to the whole of the euro area, and even posed a threat of a repeat of the 2012 sovereign debt crisis. in this context, in march the ecb announced the launch of the pandemic emergency purchase programme ( pepp ). the key difference with previous programmes is that purchases are now conducted in a flexible manner and fluctuations in their distribution will be allowed over time, among jurisdictions and across asset classes, with a view to preventing fragmentation in monetary policy transmission. the volume of purchases initially announced under the pepp was €750 billion for the whole of 2020. in june the term was extended up to at least june 2021, and the volume by a further €600 billion, making for a total of €1. 35 trillion. the pepp, together with the new purchases under the asset purchase programme ( app ), will increase the portfolio of the eurosystem ’ s securities purchase programmes to around €4. 4 trillion in june 2021. in early october 2020, net purchases of public and private sector assets under the pepp had already reached €567 billion since its launch at the end of march, i. e. 42 % of the current envelope. today we can safely say that the pepp has been clearly successful in curbing financial market deterioration in all euro area countries. this is particularly visible in sovereign yields, which are now close to their pre - crisis levels ; but it may also be perceived in other market segments such as that for corporate debt. and, of course, this decline in the cost of sovereign debt has provided policy space for fiscal authorities in all euro area countries, enabling them to take unprecedented measures to sustain the income of households and firms. indeed, the reaction of fiscal policy has also been swift and timely, both at the global and at the european level. national authorities approved sizable fiscal policy packages, focused on providing income support to firms and households, and on shielding the health - care system. it is worth noting the role of liquidity support schemes for firms, in the form of loans with favourable conditions, new credit facilities and public guarantees. in this setting, supranational support at the european level has also