FRANKFURT (MNI) – Following is the text of a European Central Bank
President Jean-Claude Trichet’s speech at the Institute of International
Finance, Spring Membership Meeting in Vienna, Austria:

Of the areas still in need of strengthening, the first relates to
macroeconomic policies that were clearly insufficiently oriented towards
medium-term sustainability. This led to the build-up of unsustainable
external imbalances between deficit and surplus economies prior to the
crisis. No effective mechanism existed to influence macroeconomic and
structural policies in key countries where those policies appeared
unsustainable from the standpoint of global economic and financial
stability.

This must change and it requires both improvements in the
efficiency and legitimacy of international institutions and a broader
awareness by national authorities of their global responsibilities. The
G20 Mutual Assessment Framework is promising in this regard. Just this
last weekend, G20 Ministers and Governors in Korea reviewed this
process, which will now be examined by Heads of State in Toronto in
early July. The momentum is here, and we fully support this overall
process.

The second shortcoming was the insufficient coordination in
financial regulation before the crisis, which encouraged regulatory
arbitrage. This was the unavoidable result of the disparity between the
increasingly global financial players, and the largely national approach
to financial regulation, with only relatively weak coordination at the
international level, despite the remarkable efforts of the Basel
Committee in respect of the banking sector.

The crisis demonstrated quite clearly that proceeding too far down
the road of deregulation is not always conducive to better functioning
markets. Rather, markets require an effective regulatory and supervisory
infrastructure to function properly. Of course, setting common rules in
complex and innovative fields such as finance requires finding the
balance between allowing financial innovation and growth, and preserving
stability for the good of the real economy. But it should remain
foremost in all our minds that the prime purpose of the financial sector
is to serve the real economy, not the other way around. Changes to the
regulatory environment should reflect that.

Given the current downturn and the volatility of financial markets,
it is imperative that the timelines for regulatory reform agreed by the
G20 in the autumn of 2008 are met. Policy-makers should remain committed
to setting rigorous standards and designing appropriate transition
periods that will allow countries and financial institutions to
implement the agreed regulatory standards consistently and fully.

In this context, the Basel Committees reform package, released
last December for consultation, forms one of the cornerstones of the
financial regulatory reform. It is important, however, that the
cumulative impact of the reform package on financial institutions and
the real economy is thoroughly assessed. We will carefully consider the
impact analysis presented by the IIF in the process of evaluating the
multifaceted impact mechanisms of regulatory changes. There may well be
differences in views on the most appropriate way of computation as well
as on underlying assumptions. We have to deliver a much safer and much
more resilient financial system that it to the benefit of the
sustainable development of the real economy. 2. The evolution of global
governance

Let me now turn to how the system of global governance is evolving
in response to the crisis. I see three major trends:

First, the scope of international cooperation is broadening
significantly.

Second, the efficiency and legitimacy of global governance is being
addressed: the mandates and governance structures of existing
international institutions are being strengthened, existing informal
fora adjusted and new fora developed.

Third, the system is moving decisively towards a much more
inclusive system of global governance, encompassing key emerging
economies as well as the industrialised countries. The acknowledgment of
the increasing role of emerging economies is a trend that predates the
recent crisis. But the crisis has made it even more pressing. Although
emerging countries have also been immediately affected, they have
rapidly become a source of strength for the world economy. In 2009, the
contribution of emerging countries to global growth was 57%. In the same
year, they represented roughly one third of world GDP at market exchange
rates (31%), and close to a half using PPP rates (46%).

There are several examples where these three trends become
apparent:

The emergence of the G20 as the prime group for global economic
governance is probably the most prominent example. It provided policy
impulse and took decisive actions during the crisis. It is now making
the transition from crisis resolution to crisis prevention. This is the
purpose of its framework for strong, sustainable and balanced growth.
Its primary goal is collectively to implement coherent and medium-term
policies to attain a mutually beneficial growth path. Since this process
is fully owned by the G20 members, and involves Heads of State and
Government, it also confirms the strong commitment at the global level
to more multilateralism in economic decision-making.

A second example is the designation of the Global Economy Meeting
(GEM) as the prime group for the governance of central bank cooperation.
This forum includes central bank governors from all systemic emerging
economies. I currently have the privilege of chairing the GEM, and find
the candid exchange of views at our bi-monthly meetings of enormous
value.

And a third example is the reform and the expansion of the
Financial Stability Board (FSB). It now includes all the systemic
emerging market economies, largely overlapping with the G20. Its mandate
has been enhanced to strengthen the international financial architecture
and global financial stability. The FSB assesses vulnerabilities
affecting the global financial system and reviews the regulatory,
supervisory and related actions needed to address them. 3. Insights from
the crisis

Let me draw to a close. Looking ahead, and distilling insights from
the financial and economic turbulence of recent years, I would like to
stress three points.

First, the crisis has shattered previously held convictions that
keeping ones house in order and self-regulation are sufficient to
ensure global welfare. We have seen that improvements are needed to
preserve the safety of the global economic and financial system. These
improvements concern rules of the game and procedures, but they also
concern attitudes and underlying values. Countries have to recognise the
global impact of their policies and financial market players have to
accept that the prime purpose of the financial sector is to serve the
real economy.

Second, more than in the past, global governance must demonstrate a
capacity to coordinate and decide extremely swiftly. A characteristic of
the turbulences that intensified in September 2008 was the extreme
rapidity in the succession of events as the crisis unfolded. The very
high degree of interdependency between all economies calls for a much
higher level of cooperation than in the past.

Third, the crisis has rightly accelerated the inclusion of emerging
markets into the framework of global governance. But there are two
reasons for this change. One is positive: the emerging economies are now
economically and financially so important, and systemically so
influential, that they must be fully involved in global governance. I
hesitate to unveil the other reason that is not flattering for
industrialised countries: they did not live up to their responsibilities
prior to the crisis. Now, the industrialised countries are called on to
contribute to the stability and prosperity of the global economy within
the new, more inclusive framework.

Looking ahead, we see that the global recovery has started to
proceed at different speeds across regions, with a relatively modest
recovery in advanced countries like the United States, Japan and the
euro area and a stronger expansion in the emerging economies. And yet,
there is no time for complacency as recent tensions in financial markets
have amply demonstrated.

Let me stress that it is important that the recovery should be
measured in broader terms than the simple resumption of GDP growth and a
return to sustainable fiscal positions: it means a full restoration of
trust in our financial institutions; it requires the healing of wounds
inflicted by the irresponsible behaviour of some financial players on
our societies and on the real economy; and it requires renewed
confidence that global governance is strong, broad and flexible enough
to ensure global economic and financial stability and resilience in the
future.

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** Market News International Frankfurt Bureau: +49-69 720142 **

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