By Max Clarke

Overestimating the potential for economic growth whilst underestimating financial risks during the last global boom cycle helped to create deep-seated imbalances within the global economy.

‘Accommodative’ monetary policy conditions helped uncertainty within one economy be easily transmitted globally at the start of the recession, through bond and equity markets. The overblown financial sector in the UK and other developed economies saw a greater portion of the economy depend upon inherently instable institutions.

This is the message delivered by Jaime Caruana, General Manager of the Bank for International Settlements at the institution’s Annual General Meeting in Basel, Switzerland.

The result of this, Caruana asserts, has been a deeper and more widespread crash than would have been the case during a bust cycle recession. Furthermore, attempts to address the damage have resulted in meagre economic growth on the same instable foundations upon which the previous growth phase took place.

“We will not have lasting macroeconomic and financial stability until we have taken decisive measures to put public finances on a sound and credible path,” explained Caruna.

“Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today. In some European countries, vulnerabilities in the financial sector weakened the state; in others, public sector weakness has infected the banks; in all, the resulting fragilities now jeopardise the benefits of economic and financial integration. There is no easy way out, no shortcut, no painless solution - that is, no alternative to the rigorous implementation of comprehensive country packages including strict fiscal consolidation and structural reforms. The design of the euro area's fiscal and competitiveness arrangements must lead to predictable, reliable and less discretionary early corrective action in good times. “

“Unfortunately, Europe does not have a monopoly on urgent fiscal challenges. The big economies also need to manage their situations carefully and make efforts to consolidate fiscal positions quickly, not least because they have a big impact on global financial conditions.“

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