Auf Deutsch
Vielen Dank fuer Ihre Gastfreundschaft hier im House of Finance der Goethe-Universitaet. Es freut mich immer sehr, die Gelegenheit zu haben Deutschland zu besuchen. Ich bin in Hamburg geboren und meine Erfahrungen als Kind in Deutschland, und auch in Polen, haben mein Welt- und Wirtschafts-verstaendnis gepraegt. Ich habe am eigenen Leib erfahren, in welchem Masse dynamische Maerkte, wirtschaftliche Kooperation und politischer Wille, ein Leben veraendern und Frieden und Sicherheit befoerdern koennen.
[I am always glad for the chance to visit Germany. I was born in Hamburg, and my experience growing up in Germany, and also in Poland, shaped my view of the world and economics. I saw first-hand the power of dynamic markets, economic cooperation, and political will to change lives, and underwrite peace and security.]
Those same forces are equally relevant today. Together, we surmounted the financial crisis through action that was bold, proactive, and coordinated. While action by individual countries was necessary, it would not have been decisive without coordinated action by Europe and the United States working together and with our partners in the G-20. In response to the most globally synchronized recession the world has seen, we joined together to mount the most globally coordinated response the world has known.
Crisis Response
Two years ago, the world economy was in the grips of a crisis on a scale not seen since the Great Depression. Trade was plunging by more than a third, global output was contracting at an annual rate of six percent, financial markets were frozen, and people were losing their jobs at an alarming rate.
We joined forces with Europe and other partners to mount a rescue that was a dramatic and unprecedented feat of peacetime coordination. In the spring of 2009, leaders representing 85 percent of the world's economy gathered at the G-20 Summit in London to develop a joint response of overwhelming force. They committed to a fiscal expansion of $5 trillion, which would raise global output by 4 percent, and to an additional $1 trillion disbursed through the international financial institutions. And they delivered. Their efforts were bolstered by ambitious--and in some cases unconventional--responses on the part of the Federal Reserve, the European Central Bank, the Bank of England, and other monetary authorities.
In parallel, to address continued volatility in financial markets, the United States undertook the somewhat unconventional step of publicly releasing the results of rigorous bank-by-bank stress tests. While controversial at the time, this step ultimately helped to restore market confidence not only in the United States but more broadly, and it enabled banks to raise substantial amounts of private capital.
But financial market stabilization and early signs of growth were again imperiled this past spring as Greece's sovereign debt travails began to infect other sovereigns in the euro area and then the world. Markets quickly reverted to anxious instability. Although markets initially got ahead of the existing institutional capabilities of the eurozone, the United States stood with Germany and other members of the EU, as well as with the ECB and the IMF, as they mounted a robust response in early May that boosted market sentiment and catalyzed institutional innovation that will be studied for years to come. This bold action was followed two months later with the first public release of detailed bank-by-bank stress tests in Europe, covering two-thirds of the region's banking sector.
These actions required considerable political resolve and highlighted two fundamental lessons of the crisis: we must act together with force at least as great as the momentum of the markets, and with clarity to lift uncertainty and restore confidence.
Our Two Challenges: Restoring Balance and Building Resilience
Having effectively navigated the acute phase of the crisis, the hard work lies ahead. And the key to our success will again lie in recognizing our common challenges and resolving to take coordinated action to overcome them.
We face two key tests in the coming months and years: restoring more sustainable and balanced growth, and laying the foundations for a more resilient global financial system.
On the first, the crisis was driven in part by large and unsustainable imbalances that had built up within the global economy. In the years prior to the crisis, low global interest rates drove asset prices to unsustainable heights. Capital from overseas surplus economies surged into deficit countries feeding asset bubbles. Particularly in the United States, there seemed to be little incentive to save with house and stock prices rising ever higher. American consumers began to spend more than they could afford, exacerbating the deterioration in the U.S. external balance.
Europe, too, was affected by its own set of imbalances. Although the euro area as a whole appeared to be in balance, diverging levels of competitiveness led to large current account surpluses--most prominently in Germany--and large deficits in the periphery and more broadly. These accumulated over time based on the ultimately flawed assumption that risks across the region should be priced at similar interest rates. This permitted several governments to spend beyond their means even as their economies were growing less competitive. Similarly, loans--often in foreign currency--flowed generously into Central and Eastern Europe on the mistaken assumption that impending eurozone membership provided a guarantee against country risks.
In September of last year, European leaders joined President Obama in Pittsburgh along with other G-20 leaders and committed to a comprehensive agenda to build a framework for more balanced and sustainable growth. They recognized that, while we are all focused on strengthening our domestic economies, we cannot do so by returning to the same imbalances that were central to the crisis.
In the United States, we are committed to doing our part. To address the issue of American competitiveness, President Obama has undertaken a serious program of structural reform. Together, the President and Congress have enacted legislation that will lead to a historic strengthening of our health care system, which will expand coverage to all Americans and lower costs to businesses and the economy. The President has promoted significant new investments in infrastructure and education to enhance our competitiveness in global markets, and he has set a goal to double American exports in five years.
Meanwhile, Americans are repairing their personal balance sheets, spending less and saving more. The President has made clear that the world can no longer depend on American households to be the consumers of last resort.
The U.S. government is focused on its finances. Along with the G-20 leaders, the President has committed to cutting the fiscal deficit in half by 2013, and to stabilizing the debt-to-GDP ratio by 2016. And the Administration has announced a number of concrete policy initiatives to help achieve this end, including a three-year freeze in non-security discretionary spending and the expiration of the Bush-era tax cuts for high-income households. The recently enacted health care reform will reduce U.S. deficits--by more than $100 billion in the next ten years and by more than $1 trillion in the decade after that.
America, however, cannot act alone. Other nations must also undertake the difficult reforms required to rebalance global growth as well as to strengthen their own economies. If America saves more, the world will grow more slowly unless domestic demand rises elsewhere. We hope to see greater balance in China's recovery with reforms that encourage domestic consumption and allow greater flexibility in the exchange rate.
We were also encouraged by our conversations earlier this month on efforts here in Germany to promote new sources of domestic demand with reforms to labor and services markets. These are efforts that will deliver long-term results, and we believe they are crucial to undertake now. Promoting balanced growth does not mean constraining Germany's exports or undermining Germany's competitiveness. Instead, it means promoting new sources of domestic demand that will support growth here in Germany and also benefit Europe's weaker economies that now struggle to recover from the crisis. More important, perhaps, it will give Germany itself a second engine of growth and deliver results that are less volatile.
Like America, Germany has made a clear commitment to fiscal sustainability. We see similar determination in other European capitals. We hope that German officials will plot their exit with an eye on the recovery as well as their new constitutional mandate. In an environment of weak global demand and low inflation, ensuring a lasting recovery must remain a paramount objective.
On the second challenge of building a more resilient global financial system, gaps and weaknesses in the supervision and regulation of financial firms on both sides of the Atlantic undermined the capacity to monitor, prevent, or address risks as they built up in the system prior to the crisis. With risks priced low and asset prices rising, regulators and supervisors were initially complacent and then overwhelmed. Failures in the system of capital requirements for financial firms were major contributors to the severity of the crisis. Where capital requirements existed, they were too low and not supplemented with complementary liquidity requirements. The rapidly emerging "shadow banking" system further exposed the system to major weaknesses. And capital standards were not applied on a globally consistent basis. Banks in many parts of the world were allowed to operate with low levels of capital relative to the risks they took on.
In Pittsburgh, G-20 leaders also committed to a comprehensive agenda to build a more resilient financial system.
Now, in America and Europe, we are beginning to deliver on our promise of fundamentally strengthening financial safety and soundness. The passage of the new Dodd-Frank law represents the most far-reaching reforms of the U.S. financial system since the 1930s. The new law constrains the risks taken by the largest, most interconnected financial firms; provides the government with critical new tools to respond to financial crises while protecting taxpayers and the economy; ensures that most derivatives are cleared through central counterparties with strong oversight; and establishes the strongest consumer financial protections in American history.
European authorities are working hard on all of these fronts as well, with new Europe-wide regulatory bodies and a systemic risk board beginning their work next year and new laws making their way through the European Parliament. We look forward to working with our counterparts as Europe's progress on regulatory reform continues.
But in neither America nor Europe is domestic financial reform sufficient. Financial firms, markets, and transactions are more interconnected than ever before, and the breadth and depth of these linkages require us to coordinate across borders. Without internationally consistent standards, large financial firms will tend to move their activities to jurisdictions where standards are looser and expectations of government support are stronger. This can intensify risk throughout the system. Financial reform will not be complete until we achieve a level playing field with high-quality standards across the world's major financial centers covering the most globally mobile activities, such as capital and derivatives.
That's why the recent Basel agreement to strengthen the quality and consistency of bank capital is so important. The new rules will increase the proportion of capital that must be in the form of common equity--the form that can best absorb losses--and will restrict forms, such as deferred tax assets, which have little value during a crisis. Banks will be required to hold more capital against the risky products and activities that caused such damage two years ago. In addition, the Basel Committee agreed to apply a leverage ratio to banks. Excessive leverage, even in seemingly safe investments, carries substantial risk. And the Basel Committee will impose minimum liquidity requirements to help banks weather unexpected funding shocks.
The new Basel III requirements will be a bedrock of the new, more resilient global financial system, and as Secretary Geithner said last week, America will deliver on its commitment to implement Basel III.
Of course, the international financial regulatory agenda extends well beyond strengthening capital. In translating G-20 principles into specific concrete measures, the U.S. and EU--the world's two largest financial markets--have a special responsibility to lead. We will never be identical. But we must work closely together to ensure that we are achieving consistent and convergent outcomes, and avoiding discriminatory regulations and policies, working together in a race to the top.
Conclusion
Now I know it makes good headlines when Europe and the United States disagree. And we often do. But the story of how we navigated the crisis is a story about vigorous and deep agreement on the central challenges and the course of action. Perhaps the most powerful tool we deployed in crisis response was collaboration.
We are now working together to build a stronger, more balanced global economy with stronger rules, stronger supervision, and stronger fundamentals. The challenges ahead require difficult structural reforms. We are not done. We must implement our reforms fairly, vigorously, and cooperatively with other countries. We must find new paths to economic prosperity for our nations and for the emerging and developing countries of the world.
Families in America and Germany spend and save based on their hopes for the future. Entrepreneurs and businesses invest and grow based on their expectations of demand for their products and services. We should not underestimate how much our collective actions can shape those expectations to provide a little more clarity and a little more optimism about the path ahead.
Danke schön. Thank you very much.
