george provopoulos : reflections on the economic and financial crisis speech by mr george provopoulos, governor of the bank of greece, at the 17th meeting of the economic and environmental forum of the osce, athens, 18 may 2009. * * * i am delighted for the opportunity to address this meeting of the economic and environmental forum of the osce. as the history of this organization clearly demonstrates, the management and resolution of security crises call for forceful and well - articulated policy responses. my presentation – reflecting my comparative advantage as a central banker – will deal with a crisis of a different kind – the economic and financial crisis that has engulfed the global economy for almost two years. my remarks will deal with four broad issues – the origins of the crisis, the policy responses taken so far, the prospects for an economic recovery during the next year, and the policy challenges that remain to be addressed. although i will touch upon global developments in the course of my presentation, my main focus will be the euro - area economy and, to a lesser extent, the greek economy. the origins for four years, through the summer of 2007, the global economy boomed. global economic growth rose at an average rate of 5 per cent a year, its highest sustained growth rate since the early 1960s, while inflation remained generally contained. to some analysts, it began to look as if the global economy had entered a new phase – which some characterized as " the great moderation " – robust growth without the ups and downs of the normal business cycle. that picture changed dramatically with the eruption of the financial crisis in august 2007, following the collapse of the u. s. subprime mortgage market. what were the factors that led to that crisis? the seeds of this crisis were planted over a number of years and relate mainly to changes that took place in the financial industry. during the past ten years or so, a dramatic shift took place in the financial sectors of many economies. the management of economic risk, aimed at facilitating trade and investment, became less of a core activity of international finance. in its place, the financial industry came to be dominated by the risk inherent in arbitrage and deliberate exposure to asset price changes. in other words, the financial system increasingly moved away from activities geared to hedging existing economic risks – activities that promote trade within and among nations – and toward activities aimed at creating and promoting new risks. clearly, the liberalization of financial markets and innovations in those markets have made important contributions to

. as you may know, greek banks have been large investors in other economies of southeastern europe. with the sharp weakening of economic activity in the region, the bank of greece has called on banks to be prudent in their assessments of economic conditions in those economies so as to limit risk exposure. finally, in line with all eu governments, the greek government has been implementing a plan for enhancing liquidity and strengthening banks'capital base. the bank of greece has been encouraging banks to make use of the plan. the challenges ahead the recovery from this crisis may be slow, but there will be a recovery. what, then, are the policy challenges that lie ahead? i believe that there are two main types of challenges that need to be addressed. the first challenge concerns macroeconomic policies. clearly, the short - term effectiveness of these policies will depend on their medium - term credibility. as i have emphasized, to retain their credibility, exit strategies will be needed to convert fiscal and monetary policies from extraordinary short - term support to sustainable medium - term frameworks. with regard to the euro area, monetary policy is formulated in a medium - term context, with the aim of ensuring price stability. measures of price expectations show that our policy is highly credible. the second challenge concerns financial sector reform. the pace of the recovery will crucially depend on how quickly confidence can be restored in the soundness of the financial system. to this end, it is essential that the revealed weaknesses in the functioning of the financial system and the inadequacies of the regulatory and supervisory frameworks are effectively and promptly addressed. in particular, there is a growing consensus among policy - makers about the need to strengthen and broaden the regulatory framework and to develop macroprudential supervision globally and in the european union. there are different views about how to best achieve that goal. at the initiative of the european commission, a group chaired by jacques de larosiere undertook a comprehensive review of the eu framework for financial regulation and supervision. the group proposes to establish a european system of financial supervisors, bringing together the national supervisors with three independent supranational " authorities " ( for banking, insurance, and securities markets ), accountable to the eu institutions. these authorities would oversee the work of, and resolve disputes among, national supervisors, who would retain responsibility for the conduct of supervision. cross - border institutions would be supervised by colleges of home and host supervisors. to bridge the gap between macroand micro - prudential oversights