ANNUAL REPORT 2008 - Polymer Bank Notes of the World

2 INTERNATIONAL ISSUES2.1 KEY DEVELOPMENTS IN THE INTERNATIONALMONETARY AND FINANCIAL SYSTEMSURVEILLANCE OF MACROECONOMIC POLICIES INTHE GLOBAL ECONOMYGiven the high level of economic and financialintegration, the global economic environmentis extremely relevant for the conduct ofeconomic policy in the euro area. As a result,the Eurosystem closely monitors and analysesmacroeconomic policies and underlyingdevelopments in countries outside the euro area.The ECB also plays an important role in theprocess of international multilateral surveillanceof macroeconomic policies, which takesplace mainly at the meetings of internationalorganisations such as the BIS, the IMF and theOECD, as well as in fora such as the G7 andG20 groups of finance ministers and centralbank governors. The assessment of internationaldevelopments with a view to contributing to astable macroeconomic environment and soundmacroeconomic and financial policies wasespecially important in 2008.The international economic environment in 2008was largely dominated by the global financialturmoil, reflecting the disorderly unwinding ofdomestic and external imbalances that had builtup in preceding years and the materialisation ofsurrounding risks.The problems resulting from the realisation ofthese risks were rapidly transmitted around theworld, given the global nature of regulatory,accounting and business models whichcontributed to practices that subsequentlyproved to be opaque and unsustainable, as wellas the strength of cross-border financial andtrade linkages. The original shock, which hadstarted in the US sub-prime housing market, wasconsiderably amplified by, among other things,financial institutions’ high debt leverage and theunderpricing of risks at the global level. Whileepisodes of market turbulence between August2007 and September 2008 were comparativelyshort-lived and limited to a relatively smallnumber of financial institutions, the occurrenceof difficulties in a number of very large andglobally active institutions caused majorshockwaves from September 2008 onwards.These triggered high tensions in the interbankmarkets and in other key financing markets,severe episodes of stress in the banking sectorsof several countries, significant changes in globalexchange rates and oil prices, a pronouncedfall in asset prices worldwide, and a markedslowdown in real activity (see also Chapter 1).Although this financial crisis originated in theUnited States, an increasing number of countrieshave been affected, including both advancedand, more recently, emerging market economies.Several countries requested assistance from theIMF (see the section below on the internationalfinancial architecture). Liquidity assistanceto central banks of other countries was alsoprovided by the major central banks, includingthe ECB and the Federal Reserve System. Forexample, the latter set up liquidity swap facilitieswith the central banks of four large systemicallyimportant economies (Brazil, Mexico,South Korea and Singapore) at the end ofOctober 2008, in an effort to unfreeze moneymarkets among emerging nations. 3Largely as a result of these developments,current account balances changed markedly in2008. First, the US current account deficit fellby 0.7 percentage point, to 4.6% of GDP, mostlyas a result of lower domestic demand. 4 Second,some countries registering current accountsurpluses saw these surpluses declinesignificantly: China recorded a decline of1.9 percentage points of GDP and Japan a fall of0.8 percentage point. Meanwhile, oil-exportingcountries as a whole recorded a rise in theircurrent account surpluses in 2008; although oilprices declined strongly towards the end of theyear, they remained above their 2007 level formost of the year. The euro area’s current accountposition moved from a surplus in 2007 to adeficit of 0.5% of GDP in 2008.3 For information on swap lines provided by the ECB, see Section1 of Chapter 2.4 The figures in this paragraph are taken from the IMF’s “WorldEconomic Outlook”, October 2008.ECBAnnual Report2008177