axel a weber : the macroeconomy and financial systems in normal times and in times of stress dinner speech by professor axel a weber, president of the deutsche bundesbank, at the joint bundesbank - bank of france conference on " the macroeconomy and financial systems in normal times and in times of stress ", gouvieux - chantilly, 8 june 2009. * * * introduction ladies and gentlemen, i warmly welcome you to this dinner on the occasion of the joint bundesbank - banque de france conference here in gouvieux. the regal ambience of this castle may help us to momentarily forget our everyday events and concerns ; however, this will certainly not last. the global financial crisis has been keeping the world on edge for nearly two years now. the turbulence in the international financial markets that erupted in august 2007 developed into a full - blown global financial crisis in september 2008 with the collapse of us investment bank lehman brothers. the deterioration of the situation in the financial market caused the decline in global economic output, which was already starting to take hold, to take a dramatic turn for the worse. industrial and emerging economies underwent a nearly completely synchronised sharp economic downturn in the last two quarters. despite growing signs that the intensity of the downturn is subsiding, past experience has shown that the economy is generally very slow to recover from recessions that are associated with real estate and financial crises. although the forecast uncertainty is currently particularly high, the crisis is likely to put a strain on global financial markets and the real sector for some time to come. to quote the opening lines to the tolstoy novel anna karenina : “ happy families are all alike ; every unhappy family is unhappy in its own way. ” this pearl of wisdom is also relevant in times of financial crisis. although virtually the entire world was bowled over by the sheer force of events, it is small details that set the individual transmission channels apart. allow me to briefly cite germany as a case in point. in august 2007, right at the beginning of the financial crisis, germany was the first country to see two banks encounter difficulties, even though we had not had any local asset price bubbles. since the financial crisis is clearly a global problem, the risk - bearing capacity of many internationally active financial institutions has now been affected severely on a worldwide scale. turning to developments in the real sector, it is striking that germany saw a particularly sharp drop in overall economic activity relative to

do in the short - term has to be consistent with what we are trying to achieve in the long - term – price stability, financial stability and sound public finances. this implies a delicate balancing act – a balancing act we shall upset if we overburden monetary policy with crisis management. 3. 2 rethinking consolidation and structural reforms? now, what about consolidation and structural reforms? here, too, we have to strike the right balance between the short and the long run. those who propose putting off consolidation and reforms argue that embarking on ambitious consolidation efforts or far - reaching structural reforms at the present moment would place too great a burden on recovery. they do not deny the necessity of such steps over the medium term, but in the short - run they consider it more important to maintain adequate demand, avoid unsettling people and nurture the recovery. but in the end, the current crisis is, to a large degree, a crisis of confidence. and if alreadyannounced consolidation and reforms were to be delayed, would people not lose even more confidence in policymakers ’ ability to get to the root of the crisis? we can only win back confidence if we bring down excessive deficits and boost competitiveness. and it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation. it is true that consolidation, in particular, might, under normal circumstances, dampen aggregate demand and economic growth. but the question is : are these normal circumstances? it is quite obvious that everybody sees public debt as a major threat. the markets do, politicians do, and people on main street do. bis central bankers ’ speeches a widespread lack of trust in public finances weighs heavily on growth : there is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike. in such a situation, consolidation might inspire confidence and actually help the economy to grow. in my view, the risks of frontloading consolidation are being exaggerated. in any case, there is little alternative. in the end, you cannot borrow your way out of debt ; cut your way out is the only promising approach. 4. conclusion allow me to conclude by going back to the beginning of my speech where i mentioned the benefits of sharing and discussing ideas. i have stressed that we have to embark on reforms that make the crisis countries more competitive ; that we have to reduce public debt and that we have to further improve the institutional framework of monetary union. but the