mario draghi : restoring confidence with more transparency interview by mr mario draghi, governor of the bank of italy, with the wall street journal, at the world economic forum, davos, 2 february 2009. * * * wsj : are there any signs markets are stabilizing or improving and if so, how much should we read into it? mr. draghi : there are markets that have started to function again, though at a reduced level. spreads on the interbank market have narrowed considerably, and the corporate - bond market has shown signs of being alive. there has been a flurry of new issuances in the first few weeks of january. we will get little bits of good news and we can enjoy them. but we shouldn't make too much out of it. wsj : what is the priority for regulators at the moment? mr. draghi : credit circuits have been clogged now for more than a year. the very first thing to do is restore confidence in the banking sector, because it's clear that until that is done there will be no significant flow of private capital to the banking sector. wsj : how do you restore that confidence when the market has become so skeptical and skittish? mr. draghi : the only thing we can do to help restart the market is to tell the world that there are certain kinds of real products that are simple to understand, easy to price and satisfy certain legal conditions. wsj : how do you do that beyond emergency measures and into the medium and long term? mr. draghi : there needs to be significant progress in developing greater transparency so we can understand what's on banks'balance sheets and what valuations are. wsj : more specifically? mr. draghi : in the future, there is going to be an unavoidable move toward standardization. with standardization, regardless of whether you have regulation, you will have a powerful push toward transparency, because people would understand and price products with full knowledge of them. it is also of primary importance that we create a centralized clearing and settlement process. wsj : aren't you afraid that the push for more regulation will put a brake on financial innovation? mr. draghi : we want to create a system which doesn't destroy the prospectives of the banking industry. standardization may well hamper growth of financial innovation, but this growth will be more sustainable through time. wsj :

stability, what in fact we would need to do is to keep overall demand in the economy continuously broadly in line with supply - side capacity, so that the actual rate of inflation is really a measure, or barometer if you like, of our success in maintaining macro - economic stability in a much wider sense. if we succeed in maintaining such stability, that would also contribute, indirectly, to improving the supply side of the economy by reducing nominal uncertainty as a factor in spending or saving or investment decisions and thereby improving resource allocation. macro - economic stability in this sense can of course be affected by either overall fiscal policy or by monetary policy. but frequent fiscal policy changes - to tax rates or expenditure programs – can generate micro - economic uncertainties so that short - run macro - economic stabilisation is normally left primarily to monetary policy. it is important nevertheless that the two arms of policy pull in the same general direction to avoid unwanted sectoral or related regional distortions. in a totally closed economy therefore the objective of macro - economic stabilisation and the respective roles of fiscal and monetary policy would be reasonably clear. but none of us – very fortunately in any wider context – actually lives in a closed economy. we are all vulnerable to external shocks to varying degrees, including of course, increasingly, shocks resulting from international capital flows. free trade and open capital markets do, as i noted earlier, bring huge benefits in terms of supply - side improvements from which we all, potentially, stand to gain. but there is no doubt that economic globalisation can at times massively complicate our national efforts at macro - economic stabilisation and it is this problem which i should like to address in the rest of my remarks. a key issue is how far we can protect our internal macro - economic stability through our choice of exchange rate regime. my short answer to that question – from the uk ’ s experience – is that there is, sadly, no ideal solution! the effective options range from floating, through some form of adjustable peg, to a quasifixed exchange rate by way of a currency board or, ultimately, full monetary union. each option has its pros and cons. let me start with floating. at first blush the idea of allowing the exchange rate to take the strain, as a kind of buffer, insulating the domestic economy from shocks emanating abroad appears very attractive. unfortunately it does not necessarily work like that. a floating exchange rate may move erratically in response to market news