The umbrella term “world crisis” hides a great deal of heterogeneity. The crisis did not occur everywhere: some countries were its sources, others felt its spillover effects.
A novel thing is that the crisis was and mostly is an issue for developed economies. The US and Europe are the best examples here. It seems the West has lost its monopoly for wisdom.
Wherever you stand on the origin of the crisis, the model of debt-driven growth is a matter of the past. This is the most challenging task we face: how to achieve sustainable growth, both now in the times of financial distress, and later when our financial systems become safer.
Sustainable growth means building a more competitive economy. Global demand is rather weak, but countries with a competitive export sector are clearly more resilient.
Increasing competitiveness requires mobilization and improvement of capital, labour and know-how. This requires new funding, but increasing debt financing is no longer a safe and sustainable way to achieve it.
One lesson from the crisis is that cross-border capital flows intermediated by banks produce diverging results. If these flows add capital for productive uses, fine. But they may bring about serious risks if they serve to boost consumption, such as FX-denominated mortgage loans.
That is why we should not hesitate to use prudential tools to better manage capital flows, since conventional capital controls cannot be applied, at least in the case of the new EU Member States.
Therefore, it is necessary to develop local-currency capital markets and domestic funding sources. The former, I am glad to mention, has always been an important area of EBRD activities.
The financial system continues to be vulnerable and the need to deleverage is very strong. This deleveraging, though doubtless needed to bring bank assets and capital into equilibrium, is potentially more dangerous in countries with high presence of foreign banks.
I have in mind countries where banks’ business model is strongly reliant on foreign intragroup funding, as in these countries the deleveraging process might hamper the development of the banking sector itself.
Another is a kind of home bias when international bank groups shrink their operations outside home markets. Parent bank repairs, however strong the need, should not hurt the economy of a host country.
All countries of operations are host countries. The asymmetry of economic interests between home and host countries is high and evident. If problems arising in the relationship are not solved in a cooperative spirit, they will pose a serious risk to EU financial integration.
The magnitude of turbulence may lead host authorities to defend the financial sector against the vagaries of financial markets, using methods that are not in line with the principles of the Single Market. That is why the Vienna 2 initiative should be commended, as it is an attempt to mitigate such tensions between host and home authorities.
To prevent another crisis the international community has invested huge efforts into a major overhaul of financial regulation. Some, like the explicit treatment of macroprudential issues, are not controversial, at least as far as the principle is concerned.
Others, like some attempts to introduce a cross-border dimension into the supervisory system, go in the right direction, but are of a partial nature and as such cannot probably function smoothly.
Moreover, in quite a few proposals we see a clear idea of more centralization in cross-border banking management and supervision. It is impossible to deny banking is a global industry nowadays.
From the perspective of the private sector this direction of change is definitely beneficial. The position of a unified supervisor facing a big international financial institution is much better than that of a fragmented supervisory system.
But there is one major doubt I retain: why is the leadership role in the process of regulatory changes so strongly dominated by those countries that have recently shown so many weaknesses in their regulatory structure and supervisory practices?
I have not come here to disparage all mature economies, but there is no reason to praise them all. Those who do deserve praise are not in the lead of the process of regulatory changes. There are also examples, where host countries – and Poland belongs here - performed much better as regulators and supervisors than home countries. Aren’t there any lessons to be learned by the advanced economies?
The question is: what shall we do now? Growth is no doubt our most pressing need. Its financing model in many countries has to change. This requires new institutions and change in policies. Some countries require more effort, some perform better and modest modifications may be sufficient.
Countries in a greater need of repair should proceed in such a way so as not to bring more harm to those that had already been harmed by the external effects of the crisis in mature economies. Moreover, the former could use the experience of the latter to a much greater extent.
Marek Belka is Governor of the Bank of Poland. This is an edited extract of his speech delivered to the EBRD annual meeting.