Trichet calls for strengthening global governance amid recovery

Jean-Claude Trichet, the president of the European Central Bank, called in New York on Monday for strengthening global governance amid the economic recovery process.

The crisis showed that gaps in the system of global governance, in terms of both efficiency and legitimacy, have to be filled, Trichet said in a keynote speech at the Council on Foreign Relations in New York.

Global governance in the financial sphere has fared during the crisis, he pointed out. "One dimension of international cooperation that I consider to have worked particularly well during the financial crisis has been that among central banks, both bilaterally and channeled through the various Basel-based committees."

"But as much as some aspects of global governance appear to have passed the severe test of the global crisis, we should remember the significant shortcomings that may have contributed to creating the conditions for the crisis to happen in the first place," he added.

"One is the lack of coordination in financial regulation that was pervasive before the crisis and which encouraged financial institutions to engage in a large degree of regulatory arbitrage. This was the unavoidable result of the fact that while financial players were becoming increasingly global, and despite the remarkable efforts of the Basel Committee in respect of the banking sector, financial regulation remained largely national, with only relatively weak coordination at the international level, " said the president.

"Another shortcoming that needs to be addressed for the future was the insufficient orientation of macroeconomic policies towards medium-term stability and sustainability. This led to the build-up of unsustainable external imbalances between deficit and surplus economies prior to the crisis," he added.

Although warnings had been voiced, including by the IMF, about the risks of a disorderly adjustment, there was no effective mechanism to influence macroeconomic and structural policies in key countries where those policies appeared unsustainable from the standpoint of global economic and financial stability.

"We have seen the crisis has driven a historic change in the framework of global governance," Trichet said.

"There are two immediate reasons for this change," explained the president. The emerging economies are now economically and financially so important and systemically so influential that they must have a full and proper ownership of global governance.

Meanwhile, "the industrialized countries have proven particularly clumsy in their handling of global finance before the crisis at the time when their responsibility in global governance was obviously overwhelming. There was therefore no reason to confirm their exclusive prime responsibility," added Trichet.

"This calls for the industrialized countries to be now particularly irreproachable in the delivery of their present and future contribution to the stability and prosperity of the global economy within the new, more inclusive framework," he concluded.

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