FRANKFURT (MNI) – There is a risk that national governments could
forget the mistakes of the past and be condemned to repeat them,
European Central Bank Executive Board member Lorenzo Bini Smaghi
cautioned Tuesday.
As the world economy slowly makes its way out of the crisis,
governments’ focus has shifted again toward “very short-term targets
related to growth and employment, but with little consideration paid to
sustainability,” Bini Smaghi asserted in remarks prepared for delivery
at a conference in Beijing and provided by the ECB.
“There is a risk that the mistakes of the past will be quickly
forgotten or even ignored as soon as conditions improve,” he said. And,
“those who do not learn from past errors are condemned to repeat them.”
Bini Smaghi warned against the dangers of sticking too close to
home in efforts to fix financial problems. Indeed, “the main lesson from
the crisis is that global problems demand global solutions,” he argued.
“We cannot get out of the crisis simply by maintaining the ‘put
your house in order’ approach to international cooperation; it should be
dealt with in a coordinated fashion,” he urged.
Advocates of a “put your house in order” school claim that national
authorities know best how to solve problems, Bini Smaghi observed. They
believe their approach is “both the recipe for corrective action as well
as the blueprint for the sustainability of the system: if each party
managed to keep its own house in order – the theory goes – policy
failures would not occur, negative spillovers would be contained, and
crises would not happen,” he noted.
But in reality, the interconnectedness of the global economy means
that policies rooted in this school of thought “cannot insulate an
individual economy from external shocks,” the ECB board member said.
“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,” he added.
“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,” he said.
“The key challenge faced by global policymakers is to make the
system safer and avert future crises. No country is immune to them,”
Bini Smaghi said.
Looking back at recent experience in the Eurozone, Bini Smaghi
underlined that surveillance “cannot be outsourced or delegated to
markets” since they “can be very erratic and move in a discontinuous
fashion.”
Analysis of Eurozone bond markets before, during and after the
crisis suggest that markets often undervalue risk in good times and
overvalue it in bad times. Thus, “market surveillance can usefully
complement, but not replace, enhanced surveillance by policymakers
themselves,” he said.
A successful exit from the crisis demands more than an enhanced
role for policy cooperation, but rather “a new paradigm,” Bini Smaghi
suggested.
“For example, even if regulation and supervision are consistently
strengthened at [the] global level, the persistence of international
imbalances (if left unaddressed) will continue to render the system
vulnerable to crises,” he elaborated.
“Policymakers thus need to recognise the fact that the
interconnected nature of today’s world economy requires a different way
of addressing policies as well as a stronger role for cooperation,” he
underscored.
Bini Smaghi envisioned “a system in which some policymakers accept
a degree of ‘intrusion’ into their policies as a quid pro quo for
intruding into the policies of others, with externalities being
internalised in domestic policymaking for the greater public good of
global economic and financial stability.”
Bini Smaghi’s prepared remarks made no mention of current monetary
policy, economic growth prospects for the Eurozone or the inflation
outlook.
–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com
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