durmus yılmaz : green shoots – how vigorous and how sustainable? speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the conference on “ green shoots – how vigorous and how sustainable ”, imf - world bank annual meetings 2009, istanbul, 5 october 2009. * * * ladies and gentlemen, first of all, i would like to welcome everyone to istanbul. it is a great pleasure for me to be here addressing such a distinguished audience as we convene for the 2009 annual meetings. “ green shoots ” has been a popular metaphor to describe the recovery process. and today, i will try to elaborate on our path to build a career as a prudent gardener. i want to begin with discussing the path that brought us to this crisis. then, i will talk about the recovery signals in both global and turkish economy. i will conclude my speech with my thoughts on the solidity and sustainability of these signals. as is well known, financial strains originated in advanced economies abruptly mutated into a full - blown crisis and had a devastating effect on international capital markets. as the crisis intensified, measures of perceived risk escalated to record levels and major financial institutions suffered massive losses. at the same time, liquidity shortages, tighter credit conditions, and heightened uncertainty were associated with a sharp decline in both private consumption and investment spending. in fact, many economies fell into recession or have seen their growth rates decline sharply. as a consequence, global trade contracted, financial flows dried up, and unemployment rates soared. the global financial system is still under stress ; but one can see some signs of recovery in the global financial markets and economic indicators around the world. unprecedented policy reactions to the crisis taken by governments and central banks worldwide have managed to stabilize the financial markets and reduced liquidity concerns. especially, thanks to ease of tension in the global financial markets, emerging market equities have boosted and spreads have narrowed. commodity prices have rebounded from their recent low levels while capacity utilization and industrial production have globally recovered modestly. as a consequence, international institutions like the imf and oecd announced that the global economy will recover sooner than expected and they are getting more and more optimistic regarding their projections. in the words of winston churchill who had seen the sunlight after the darkest days of the second world war : “ this may not be the end. it is not even the beginning of the end. but it is, perhaps, the

and comparing the euro area with its major global partners, the fiscal problem appear relatively modest. next year, the average euro area budget deficit will be in the order of 4. 6 %. by 2012 it is expected to decline further to 3. 9 % ( source ec autumn 2010 economic forecast ). these expected numbers are about half the corresponding expected figures for the us and japan. the problem, the source of the current tensions clearly reside with national fiscal developments, notably localised in those countries that have not done enough to correct imbalances or to prepare for difficult times, when times were still good. we know that for several years, fiscal policies in some european countries have breached both the letter and the spirit of the stability and growth pact. the pact calls for budgets that are close to balance or in surplus over the cycle, deficits always below 3 % of gdp and a public debt level of below 60 % of gdp. when a few years ago it became clear that in some important countries fiscal policies would not be able to meet the rules of the stability and growth pact, it was not the policies that were changed but the pact. this was clearly a dark moment in the history of european policy decision making. in 2004 and 2005, the governments of the three largest member economies coalesced to try and dismantle the stability and growth pact. it was a very fierce battle at the time, and the ecb publicly voiced its grave concerns. the recent crisis has demonstrated that growing underlying macroeconomic imbalances can also destabilise fiscal policies and place a country on an unsustainable trajectory. a boombust cycle can mask a fiscal problem for a long time and suddenly expose the problem when it turns. high fiscal elasticities tend to curb budget deficits – and even produce overall surpluses – when asset price run - ups boost revenues from financial and housing transactions. the same elasticities, however, will send the budget into distress when the boom reverses. the second area of policy slippage concerns macroeconomic policies. here what stands clearly in front of the policymakers is the sustained increase in unit labour costs whose growth in some member countries has consistently outpaced both domestic inflation and euro - area average union labour costs. such competitiveness losses cannot be sustained forever, and catching - up phenomena can only explain a limited part of the process. sooner or later adjustments in unsustainable economic policies have to be made. fiscal and structural policies need to keep domestic demand