ewald nowotny : european monetary union – lessons from the debt crisis opening remarks by prof dr ewald nowotny, governor of the central bank of the republic of austria, at the 40th economics conference of the central bank of the republic of austria “ european monetary union – lessons from the debt crisis ”, vienna, 10 may 2012. * * * ladies and gentlemen, let me warmly welcome you to the 40th economics conference of the oesterreichische nationalbank. in particular, i ’ d like to welcome austrian federal chancellor werner faymann and this year ’ s keynote speakers, peter praet, member of the executive board and chief economist at the european central bank, and klaus regling, ceo of the european financial stability facility. and it is a great pleasure to welcome all other high - level speakers, representing the european economic and financial architecture, academia and european institutions. over the past four decades this conference has offered a platform for discussion between policymakers and economists with an institutional and academic background. it has played a useful role in creating new ideas and stimulating political reactions to ever - changing economic environments. this year ’ s conference, entitled “ european monetary union : lessons from the debt crisis ” focuses on economic developments in europe and the corresponding policy reactions from 2007 until today. recent developments in international bond markets indicate that unfortunately, the fiscal problems in the euro area cannot be considered to be completely solved yet. the aim of the conference is to identify possible further policy responses to the crisis and to offer a forum for discussion on how to tackle future challenges. from a historical perspective, sovereign debt crises are clearly recurrent phenomena. going back to the pre - world war ii period, various european states ran into difficulties servicing their debt and some of them defaulted. ( reinhart, c. m. and k. s. rogoff ( 2008 ). this time is different : a panoramic view of eight centuries of financial crises ). since world war ii, however, there have been no cases of sovereign default in western europe. rather, sovereign default became a phenomenon typical of emerging and developing countries. due to their high dependency on international lending and their high responsiveness to changes in the monetary policy of creditor countries, fluctuations in exchange rates and commodity prices, many of these – mostly african or latin american – countries encountered severe financing problems. hence, debt restructurings in latin american countries has been the topic of numerous economic publications. thus, it was quite an unhappy innovation when

the large profits of risky business while being bailed out in the event of a risky investment turning sour invite imprudent risk - taking, thereby putting the stability of the international financial system itself at risk. three approaches to private sector involvement compete in the international debate although they are not mutually exclusive but may be combined : collective action clauses, a code of good conduct and a sovereign debt restructuring mechanism. the sovereign debt restructuring mechanism was put forward by the imf but, despite certain modifications, did not appeal to the international community. collective action clauses ( cacs ) in international bond issues ensure that an agreement on the restructuring of sovereign debt cannot be undermined by litigating minority investors. this market - based solution is now almost standard in new international bond issues after mexico went ahead in february 2003. however, cacs can be only part of a solution as they, by their very nature, cannot solve the issue of coordinating a multitude of bond issues by one single debtor, as, for example, in the present case of argentina. to take account of this problem, it may be advisable to go back to certain elements of the proposed sdrm such as the aggregation of liabilities. we must be aware that the transitional period up to the time when all bonds outstanding contain cacs will span almost three decades. as a third proposal that was originally forwarded by the banque de france one and a half years ago, a code of conduct is currently being negotiated between the private sector and governments of some g - 7 and g - 20 countries. the purpose of such a code would be to facilitate the introduction of certain procedures and a number of recognised principles for governing the very complex debtor - creditor relationship in the event of increasing market tension or acute crises. the code could serve both to keep crises from coming to a head and to make unavoidable debt restructuring run more smoothly. the code, which would not be legally binding, would spell out basic principles about both crisis resolution and crisis prevention. the bundesbank backs the development of such a code and hopes that consensus can be found soon, maybe as early as this autumn. if these efforts are to involve the private sector in the process of crisis resolution with a view to delivering the desired result of greater stability of the international financial system, the international financial institutions need to break with their generous lending habits of the recent past. large - scale lending beyond regular access limits, long - term recourse to fund resources, and the