Good afternoon, ladies and gentlemen.
Five years after the start of the financial crisis, the world economy is still in a fragile state. This fragility is not primarily cyclical - rather, it reflects fundamental weaknesses shared by many countries. There has been progress in addressing these long-standing problems, but more remains to be done. This is why output in the advanced economies has barely returned to the levels reached at the outset of the crisis.
Confidence in the global recovery has eroded further over the past few months. Markets are jittery. Growth prospects in the advanced economies remain modest. European financial markets are under stress, and a number of European countries are in recession.
Emerging market economies are growing more strongly than the advanced economies. Over the past five years, their expansion has accounted for three fourths of global growth. It was thanks to earlier reforms - often pursued when domestic demand was contracting - that many returned to strong growth and were able to pursue countercyclical policies during this crisis. But emerging markets have recently felt increasing strains from unbalanced growth, and some are struggling with inflation pressures. They are not immune to the global slowdown.
In these difficult circumstances, calls for further economic stimulus are not surprising. Some advocate additional monetary accommodation; others suggest a softening of the new financial regulatory regime; and still others recommend postponing fiscal consolidation and structural adjustment in the private sector until happier times. The common basis for all of these proposals is that, if only policymakers were less rigorous and stimulated more now, growth would eventually come to the rescue. If only it were that simple!
The main roadblock to sustained growth is not a lack of economic stimulus. Instead, it is a vicious cycle of adverse feedbacks between three fundamental weaknesses, all related to balance sheets:
Central banks find themselves caught in the middle, forced to be the policymakers of last resort. They are providing monetary stimulus on a massive scale. They are supplying liquidity support to banks unable to fund themselves in private markets. And they are easing government financing burdens by keeping interest rates low far out along the yield curve. These emergency measures could have undesirable side effects if continued for too long. A worry is that monetary policy would be pressured to do still more because not enough action has been taken in other areas. While central bank actions can buy time, they cannot substitute for balance sheet repair or reforms to raise productivity and growth. Central banks cannot solve the problems neglected by other policies.