– the current growth model is perceived as being sustainable. the same could probably be said of other major economies, like the us. sooner or later, however, the unsustainability of domestic policies can be expected to materialise in a crisis. this is particularly the case if, as we witnessed prior to 2008, rising imbalances go unchecked because of weaknesses in market discipline and, all the while, negative externalities persist without redress owing to the absence of a collective or higher authority to rein in what tommaso referred to as “ robust political and economic interests ”. crises impose potentially severe domestic economic and financial disruptions on an economy and, at best, lead to a more sustainable model of growth, albeit at a very high price. at worst, they condemn a country to protracted low growth. in both cases, global economic performance and stability are undermined to a greater or lesser degree. 3. responses how should these weaknesses be corrected? is the answer to be found indeed in international policy cooperation? i tend to share tommaso ’ s view that soft international cooperation alone, though necessary, would not be sufficient. in his words, “ coordination fails precisely when it is most needed, i. e. when policy preferences are most divergent ”. my experience confirms that even in the wake of the global financial crisis – which brought home global interdependencies and the porosity of national boundaries for national policies – international cooperation continues to be based on the premise that the pursuit of national interests is the best approximation of the pareto superior result. it is the philosophy underlying the g20 mutual assessment process, which seeks to achieve strong, sustainable and balanced growth. another weakness of the current international monetary system is that in its centre of gravity – the united states – economic and monetary policy are shaped to suit domestic interests. the current system mimics therefore, as i said earlier, a generalised version of the triffin dilemma. tommaso recognised it as such and identified some of the elements of a solution. first, he argued for some sort of “ common exchange rate mechanism ” which would ensure that every country agrees to shoulder its responsibility for the appropriate valuation of their currency and that exchange rates are determined by the interaction between the market and economic policy. he anticipated that this would be well supported by floating regimes for large currencies, while smaller countries may thrive with an intermediate regime consistent with the geographic pattern of their economic and financial linkages, possibly a

even turn out ex post to be an “ accounting illusion ”. so why is there such short - termism in policy - making that results in unsustainable domestic policy frameworks and global economic and financial instability? let me offer four thoughts : first, there is the primacy of the electoral cycle. policy - makers tend to maximise utility functions, which incorporate only national objectives over a limited time horizon. in such a context, it is difficult to enforce policies resulting from international commitments that may, over the short term and particularly in the run - up to an election, be seen to contradict national objectives. second, policy - makers face asymmetric opposition to change. interest groups that profit from the current system are usually far more organised and vocal in opposing change than the silent majority, both nationally but also internationally, which could potentially benefit from economic reforms. third, and moving away from political economy considerations, it is very difficult to assess equilibrium values for certain key variables. therefore, fundamentals are often over - or underestimated depending on the country and the point in time. imbalances are, thus, financed for too long and at too favourable prices, so any eventual corrections turn out to be very sudden and sharp. fourth, there is habit persistence and sluggishness in the adjustment process, as large international players are sometimes trapped in a given policy framework. for example, despite the financial crisis, policy incentives arising from the us ’ s exorbitant privilege remain unchanged in the presence of sizeable and liquid us financial markets and the strong international role of the dollar as a reserve currency. at the same time, in the case of china, the current growth model still delivers acceptable results – even if it is at the expense of amartya k. sen : collective choice and social welfare. holden - day et al., san francisco, 1970. mailath, g. & samuelson, l. ( 2006 ). repeated games and reputations : long - run relationships. new york : oxford university press. padoa - schioppa, tommaso ( 2010 ) : “ the ghost of bancor : the economic crisis and global monetary disorder ” 25 february 2010, page 4. bis central bankers ’ speeches some segments of society and, as such, represents an implicit tax on them. given that the accumulation of major imbalances in china persists and does not disrupt other aspects of the economy – thanks to financial repression and a closed capital account