duvvuri subbarao : the global economy and framework intervention by dr duvvuri subbarao, governor of the reserve bank of india, at the g20 ministerial meeting, washington dc, 15 april 2011. * * * chairperson, finance ministers and colleague governors, 1. after its very successful efforts at a coordinated response to the challenges emerging out of the recent unprecedented global financial crisis and safeguarding the process of economic recovery, the g - 20 is now turning to the more challenging task of addressing structural imbalances in the global economy. india has had the privilege of cochairing, together with canada, the g - 20 collective effort towards drawing up a framework for strong, sustainable and balanced growth. the success of this initiative is critical for a durable global economic recovery and for better global economic and financial governance. importantly, the success of this initiative is also critical for the credibility of the g - 20 and its ability to forge a consensus in non - crisis situations. 2. at the seoul summit last november, the leaders of g - 20 tasked us to formulate indicative guidelines for the identification of persistently large imbalances requiring corrective action, including their root causes and impediments to adjustment. earlier this year at paris, we decided to break up the exercise into an integrated two step process. for the first step, while agreeing on a set of indicators, we resolved to firm up indicative guidelines against which each of these indicators will be assessed to identify persistently large imbalances by our next meeting in april. we now need to finalize these guidelines and move on to the second step of the exercise. presumably, this would focus on root causes, impediments to adjustment and corrective policies and actions. 3. having set the context, i would now like to make four comments. 4. first, the imf is doing a commendable job in providing timely technical inputs for our exercise. developing the indicative guidelines requires selection of reference values or norms for each indicator, as well as rules to guide the assessment of the indicators against the norms or reference value to determine if imbalances are large. this has been done using two different methodologies – structural and statistical. while the imf ’ s preference is for the structural approach because of its theoretical consistency, given the inherent fragility and contestability of econometric estimates that can deviate sharply from the observed data, the framework working group has designed a method that combines these two

clear the need for more fiscal integration – a challenge for the future, to which we will return. what about the present crisis of the euro area? two or three years ago, there was widespread skepticism on the western shores of the atlantic and the english channel about the viability of the monetary union, and there was much discussion of what would happen after the breakup of the present euro area – whether there would be one or two euro areas, one for the stronger countries, one for the weaker, and if so, how well each of the two blocs would fare. with one sentence – the sentence that included the words “ whatever it takes ” – that skepticism was largely, though not totally, erased. with one decision – the decision to implement qe – it became clear that the ecb has the capacity both to decide to implement monetary policy at the zero lower bound – indeed below the zero lower bound – and to succeed in implementing that policy. there can be no one whose bayesian priors have not moved in favor of the survival of essentially the present euro area, even though we still await the outcome of the greek crisis, and even though we know that the present crisis is not yet over. is this an example of the success of the monnet approach? absolutely. european monetary policy in the earlier part of the great financial crisis was innovative, particularly in the invention of full - allotment outright monetary transactions. that policy was inspired by crisis, as were the innovative policies undertaken by the fed in the united states. more important than that : it is hard to believe that a european banking union would have been put in place by 2014 if it had not been for the crisis. and it is no less difficult to believe that a single supervisory mechanism would have been set up absent the crisis. of course, one may say that the ability to make these difficult decisions depended on the skills of the leadership of the ecb – and that is true, and will always be true. but the fact is that, when needed, europe produced the monetary policy leadership it needed. what of the future? what crises, what extremely difficult decisions, await the eu? some are already visible. the decision to use the single currency to drive the european project forward was a risky one, and at some stage or probably in several stages, it will be necessary to put the missing fiscal framework into place. and that, if it happens, will be another example of a crisis – the present crisis, one hopes –