its decision on bilateral surveillance over members ’ policies and placed the concept of external stability ( the country - level counterpart to international stability ) at its heart. the decision also reaffirmed that fund surveillance should focus on promoting countries ’ external stability and examining whether a country ’ s exchange rate, fiscal, monetary and financial sector policies are consistent with this objective. unfortunately, the imf ’ s 2007 surveillance decision was never implemented as originally devised, largely because of some countries ’ resistance to having their exchange rates labelled as “ fundamentally misaligned ”. the revised surveillance guidelines have shied away from this label in an effort to reduce stigma and thereby increase the traction of fund surveillance with policy - makers. i will come back to this and other fund efforts to modernise surveillance at the end of my talk. weaknesses in surveillance before the crisis were not only apparent in multilateral institutions but also in regional peer - reviewed mechanisms, such as the ones underpinning the economic governance of the euro area. the problems associated with the implementation of the eu ’ s stability and growth pact ( sgp ) and the statistical deficiencies which undermined confidence in greece have been the salient examples in this regard. i will also come back at a later stage to the policy efforts undertaken by european authorities to deal with these shortcomings. not all the pre - crisis surveillance failings can be attributed to the inadequate identification of risks. even when the policy prescription was correct, implementation was lagging. in 2006, the imf organised a series of discussions with systemic players in order to devise a concerted solution to the problem of global imbalances. this initiative was an important step forward in itself, as it was a clear recognition that the system was not self - sustaining and that policy externalities on peers could be significant. however, the policy response by the parties involved in the imf ’ s multilateral consultation process on global imbalances was lacklustre. 2. the global transmission of the crisis the level of interconnectedness in the world economy means that policies inspired by the “ put your house in order ” philosophy cannot insulate an individual economy from external shocks. in this context, the role for international policies is twofold. first, international cooperation can restore market confidence – the lack of which is an important source of contagion. second, adopting a new regime of international cooperation to avert a new crisis would also benefit domestic financial and economic stability. channels of contagion the crisis was severe

lorenzo bini smaghi : what has the financial crisis taught us? the global dimension and international policy cooperation speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the 21st century forum 2010, beijing, 7 september 2010. * * * abstract a striking feature of the crisis is the synchronised manner in which shocks have been transmitted across market segments and countries. and a key lesson of the crisis is that keeping an economy in order does not necessarily insulate it from external shocks. an excessive focus on the domestic economy may exacerbate global economic and financial imbalances, ultimately making future global crises more likely and more severe. the key challenge faced by global policy - makers is to make the system safer and avert future crises. a new paradigm for international cooperation is thus required from global policy - makers – one in which longer - term objectives, such as sustainable growth, are fully internalised. the speech also highlights the importance of peer - reviewed mechanisms and strong surveillance in this context. introduction 1 it is a great pleasure to share with you some thoughts about the financial crisis, which will be the focus of my talk today. if i had to pick a striking feature of the crisis from which we can draw lessons for the future, i would choose the term “ contagion ”. it ’ s contagion that has made this crisis truly global. the synchronised manner in which shocks have been transmitted across market segments and countries is perhaps what distinguishes this crisis from previous ones. the growing interconnectedness of the world economy has enabled the crisis to spread above and beyond what would be warranted by fundamentals and to attain a truly global dimension. to me, a key message for all of us from the crisis is that keeping an economy in order, keeping one ’ s own house in order, so to speak, does not necessarily insulate it from external shocks. moreover, an excessive focus on the domestic economy may actually exacerbate global economic and financial imbalances, ultimately making future global crises more likely and more severe. the key challenge faced by global policy - makers is to make the system safer and avert future crises. no country is immune to them. strengthening international cooperation in the global economic and financial sphere is crucial. policy - makers have been paying lip - service to international cooperation for years. it is a policy prescription that is commonly stated but – let ’ s admit it – rarely defined