josef bonnici : the changing nature of economic and financial governance following the euro area crisis introductory remarks by professor josef bonnici, governor of the central bank of malta, at the malta financial services authority, attard, 17 january 2013. * * * the success of the european monetary union was always contingent on three considerations. the first requirement is the maintenance of fiscal discipline ; the second is effective financial regulation and the third condition is the management and minimization of macroeconomic imbalances. in reality, these requirements were often not met. in fact, there was a general lack of awareness of their importance. for the past several years, the headlines have been dominated by the ramifications of the european crisis, which was first manifested in the banking system and then in sovereign debt markets, and subsequently in the economic slowdown and related problems that followed the introduction of fiscal consolidation. the european central bank has engaged in a wide range of policy measures that seek to expand liquidity and restore normal conditions in the banking sector and in the financial markets. these monetary policy measures include conventional or standard measures, which have reduced policy rates to very low levels. in addition the ecb has adopted various non - standard measures, which have included long term refinancing operations that inject ample liquidity into the financial system. the ecb has gone a step further by announcing an outright monetary transactions ( omt ) programme. this is designed to repair the link between policy rate cuts and ample liquidity provision, on the one hand, and lower borrowing costs, on the other. it is also meant to counter the socalled redenomination or convertibility premium that compensates investors for the perceived risk of a breakup of the monetary union. omt are actually equivalent to traditional open market operations that central banks have long resorted to in order to provide stability and a better functioning of the monetary transmission process that can get impaired in certain circumstances. the unfolding of the crisis has revealed various intertwined dimensions of the existing fragilities and a broad range of imbalances. in various ways, the problems that are evident in the euro area are of a structural nature, resulting in a number of governance reforms that are currently underway. inappropriate banking practices, weak regulatory frameworks, fiscal slippage and deterioration in competitiveness are now recognised as the main sources of the crisis. a fundamental aspect of the banking crisis is the failure of regulation, which allowed financial institutions to engage in excessive risk that was not

currency markets. however, despite the major declines in asset markets, large shifts in financial flows, significant movements in major currencies, financial stress in the corporate and financial sectors in a number of countries followed by overall economic weakness, the east asian economies have emerged relatively resilient. going forward, it is recognized that a higher tolerance level to sudden changes in economic conditions and to the more volatile market conditions is necessary. building such tolerance levels involves enhancing the capacity, strength and resilience of the economy to cope with the external shocks to the system. indeed, the east asian region has the potential to enhance its capacity to deal with the risks and vulnerabilities and the potential to continue its growth process. while countries in the east asian region have many common characteristics, they are also diverse in several aspects. common features include openness and export orientation and a high rate of growth of manufactured exports. most countries have a high rate of capital accumulation supported by a high rate of savings. macroeconomic stability has prevailed in most countries. inflation has been relatively low and any external imbalances were of manageable proportions while the fiscal deficits have been modest and government debt levels have been kept low. the countries in the region are, however, diverse in terms of natural resource endowments, the stage of financial sector development, the degree of market orientation of their economies, the choice of exchange rate regime and the degree of public policy activism. the overall growth strategy of the region has essentially been based on an export - oriented industrialisation drive. this model, which is based on high savings and investments, has indeed served the region well. in the current environment of slower growth, the strategies adopted by several of the east asian economies have been to implement a series of pro - growth policies to contain the impact of the global slowdown on the domestic economy. the strong initial conditions in an environment of an improving outlook in the major economies, lends support for increased optimism for stronger growth in the near term. going forward, however, the growth prospects in the east asian economies are likely to continue to depend to a greater extent on domestic demand. the strength of export growth will depend on the overall pace of the global recovery. the strategies that malaysia has adopted include initiatives to strengthen and diversify the economic base and to develop and strengthen the financial infrastructure including the regulatory and supervisory framework. the emphasis was on pacing the liberalisation process according to the ability of the system to absorb a more competitive environment, and developing important