Luis M Linde: New challenges for central banks

Address by Mr Luis M Linde, Governor of the Bank of Spain, at the Panel "New challenges for central banks", 2018 Gaidar Forum "Russia and the world - values and virtues", Moscow, 17 January 2018.

I. Taking a step back: three main developments have defined the global economy in the 21st Century.

  •  Globalisation. The period between 1990 and the early 2000´s was characterised by an intense process of globalisation, with rapid growth of trade and financial relations among countries. For instance, between 2000 and 2007 the growth of world imports averaged 7.4% per year, about twice as much as global GDP growth. Global banking also expanded markedly, in terms both of cross-border activities and local entry into banking sectors overseas. The crisis entailed a dramatic and severe reversal of this trend. Trade plunged by more than 10% in 2009, an extraordinary collapse by historical standards. Since 2012, trade has gradually recovered at a slower pace than pre-crisis levels, with imports growing around 3% annually. Financial markets experienced a sudden stop in the fall of 2008. The decline in global banking activity has been particularly pronounced in cross-border positions vis-à-vis advanced economies, which declined by 20% between 2008 and 2017, whereas cross-border lending to emerging market economies increased by 44% during the same period (primarily driven by very strong lending to China).
  • Global Financial Crisis. During the years of expansion of the so-called Great Moderation, from the mid-80s until the crisis, the global economy was progressively accumulating high levels of debt and leverage, assisted by easy financing conditions and the underpricing of risk.This led to increased vulnerability of the global economy and to the accumulation of bubbles, mainly in the financial and real estate sectors in advanced economies. What took us all by surprise was the intense depth and global nature of the crisis that exploded in 2008. In a context of high integration and complex interconnections between financial institutions, instability spread rapidly across markets and economies, leading to the most serious global financial crisis of the last 80 years. In the European Union, the crisis was exacerbated by a double-dip recession, which hindered our recovery period and revealed as well the weakness of the institutional framework of the euro area.