global credit supply. 12 the intermediation role of european banks in the global dollar - denominated market before the crisis is a case in point. following the crisis, global banks retreated from cross - border lending, amplifying the impact of the financial crisis on those economies that did not have alternative sources of funding, and prompting partial substitution by official credit. this happened both at the global level after the demise of lehman brothers, prompting large - scale intervention by the imf and by multilateral development banks, and within the euro area after 2010, prompting official support through the efsf and esm, and liquidity support by the eurosystem to banks in stressed jurisdictions. here again, the euro area can be seen as a microcosm of the global economy – just as a korean garden is a microcosm of nature. global liquidity and international risk - sharing in the current environment one important point in this context is the emergence of a “ home bias ” and de - globalisation following the global financial crisis. these trends have profound effects on the degree of international risk - sharing. but are they only temporary or do they constitute a level shift in the steady - state level of financial integration? an optimistic view is to consider the global financial crisis as a temporary shock, which impact will fade away. the persistence of a shock, however, depends on the structural and institutional features of an economy, as well as the corresponding policy response. and there are some worrying signals at the global level. in the following brief examples, i will illustrate how the interaction of institutions and shocks can shape the new post - crisis steady - state level of financial integration. in advanced economies, for example, financial regulation and other forms of public intervention have contributed to global fragmentation. government bail - outs, risk - based capital requirements and the ring - fencing of capital and liquidity by local supervisors have constrained banks ’ risk - taking outside domestic jurisdictions. 13 in the euro area, this has been compounded by the perception of a rising risk of sovereign default, eroding the fiscal backing of cross - border liquidity provision. 14 as a result, the rise in idiosyncratic country risk in peripheral countries and the associated increase in government bond yields was accompanied by a steady increase in the share of domestic holdings of government debt securities ( see slide 8 ). financial fragmentation can, however, also be observed at the global level. looking at banking statistics in advanced economies, the relationship between domestic and international

to start in the course of 2002 and to accelerate in 2003. the risks previously envisaged in connection with the 11 september events appear to have largely evaporated. nevertheless, the level of uncertainty on the precise timing and strength of the recovery remains high. while i am reasonably optimistic about the sustainability of the recovery that, we expect, will start this year, i am also aware of the remaining downside risks. these risks relate, for instance, to the imbalances that have built up during the past episode of exceptionally strong growth in the world economy and have only been partially corrected. examples of these imbalances are protracted current account deficits, household and corporate indebtedness, overinvestment in certain industries, and fragility in the financial sectors of some countries. in that context, an important issue is the extent to which trade will finally pick up from the historical lows witnessed in the second half of 2001, and how beneficial the international transmission mechanism will be in transforming the current limited signs of recovery into a virtuous circle for world growth. needless to say that protectionism and, more generally, obstacles to further international trade integration would be counterproductive also in this respect. in this context, i think we all agree that china ’ s entry into the wto has been a significant step towards further progress in world trade development. economic outlook for the euro area let me now turn to the economic outlook for the euro area. overall, 2001 was a rather disappointing year with regard to macroeconomic performance : growth in activity was below potential and consumer price inflation was above the 2 % limit set by the ecb for price increases over the medium term. this disappointing performance was the result of an unfortunate combination of adverse supply and demand shocks, originating to a large extent from developments in the external environment. these included the sharp increase in oil prices in 2000 and early 2001, the slowdown in the us economy and the terrorist attacks in the united states. taken together, these adverse shocks led to a protracted weakening in demand – from both the external and the domestic side – and to considerable uncertainty with regard to the outlook for growth. looking ahead, we expect that the negative impact on growth and inflation from these adverse factors will diminish and that this will pave the way for a more satisfactory macroeconomic performance this year and next. most recently, projections have shown that real gdp growth in 2002 as a whole should be somewhat lower than in 2001, but