miguel fernandez ordonez : what should be done during the macroeconomic adjustment phase in spain? speech by mr miguel fernandez ordonez, governor of the bank of spain, at a lunchconference organised by el correo de andalucia, seville, 25 september 2008. * * * since august last year the world ’ s developed economies have been convulsed by two very severe shocks : the rise in oil and other commodity prices and the outbreak of financial turmoil that has reached dimensions that nobody could have imagined initially. the increase in commodity and oil prices seems to be easing, and yet the events of recent weeks suggest that, as regards the turmoil, we are probably experiencing the most significant financial crisis since 1929. there are already numerous reports by domestic and international agencies ( imf, oecd, bank for international settlements ) analysing the causes and consequences of the situation the industrialised economies are currently going through. at first it was thought that the repercussions of the financial crisis would be concentrated in the us economy. then it was considered that other industrialised economies in which debt, the external imbalance or the property boom may have been important, like the uk, spain, ireland and new zealand, might also be affected, while other countries would remain beyond the contagion. but this has not been the case. the effects have reached all countries. as we have just seen with the release of q2 european growth figures, countries with large external surpluses such as germany, have also posted a very weak economic performance. as a result, today, unlike a few months ago, nobody is defending the possibility of certain european economies decoupling from what is happening in the united states. as you can imagine, the spanish economy has not been able to remain unaffected by these processes. in fact, our country, which had been building up certain imbalances, in the form of rapid growth of household and corporate debt and, consequently, of a large external deficit, had already embarked upon a smooth correction from mid - 2006. however, global events have accelerated and intensified this adjustment, even though, from the viewpoint of the financial system, spanish banks have had absolutely nothing to do with the causes of the financial crisis. they have not generated doubtful assets like us banks have, nor have they invested in these assets like many european banks have. however, the financial crisis has not only affected the institutions that generated these toxic products or invested in them but, by

the services sector. turning to the international financial system, banks have gained in soundness and are now in a position to face a correction of the global imbalances, even if this were accompanied by some adjustment of financial conditions and a moderate increase in volatility. however, further headway must be made in improving the measurement of the risks implicit in the complex financial linkages present in some segments of the international financial system. although they provide for greater risk diversification, greater financial integration, new participants on the markets and the emergence of new financial instruments all make it more difficult to determine on which agents and sectors the risks finally fall. it is also more complicated to evaluate, where necessary, the risks of excessive concentration in segments where supervision by regulatory bodies is lighter. it is thus important to foster awareness in companies, and in households too, of the risks they assume, and for regulators to exercise effective surveillance of financial intermediaries and markets. all the more so given that the uncertainty over the effects arising from future bouts of turbulence on the markets will be exacerbated by the fact that this relatively new financial structure has not so far been tested in less favourable phases of the business cycle. in this respect, the volatility seen on international financial markets in recent weeks serves as a reminder of the need for prudent risk assessment and for the right resources to adapt to a broader and more demanding financial environment. but it is not only the conduct of national authorities that must rise to the challenges entailed by the ever - increasing complexity of our financial systems. at the international level, growing economic and financial integration requires reconsideration of the guiding principles of the multilateral financial institutions, which have hitherto remained perhaps too anchored in the bilateral supervision of national policies, without paying sufficient heed to the increasingly complex links globally. the strengthening of multilateral surveillance, especially in the financial realm, would thereby provide for a more effective contribution by these agencies to embedding international monetary and financial stability. the european environment in 2005 the euro area economy posted a modest average increase in gdp, and one lower than in 2004 and than in the other developed economic areas. nonetheless, year - on - year growth was on a rising profile throughout 2005, attaining a rate of increase in line with potential in 2006 q1. the economic performance differed, in fact, from the first to the second half of 2005. in the first six months output was markedly sluggish, the result among other