Public Information: Yves Mersch: Current Challenges in the Sovereign Debt Crisis

This is public information released by the BIS.

Speech by Mr Yves Mersch, Governor of the Central Bank of Luxembourg, at the SWF (Sovereign Wealth Fund) Forum, Montreux, Switzerland, 24 October 2011

To download the full speech (BIS)
To download the full speech (SWF Institute)

Ladies and Gentlemen,

It is my pleasure and privilege to talk in front of this audience of experts and practitioners. I do thank the SWF Forum for this opportunity to share my thoughts on the current challenges of the sovereign debt crisis in Europe.

Montreux seems to be the perfect setting for a central banker to speak. Is there a better symbol for stability and long-term nature than the surrounding Alps? And Lake Geneva represents a perfectly balanced level of liquidity – while central bankers have to deal with the contradiction of abundant global monetary liquidity and a shortage of market liquidity in certain asset classes.

But without further ado, let me embark in today’s topic.

Need for clarification: the often forgotten strengths of the euro area

Some countries in the euro area face a combination of high levels of indebtedness, budget deficits and weak or absent growth. Amid growing market turmoil and the risk of contagion an increasing number of economists call for debt restructuring in the affected countries. These proposals often share an anti-Euro sentiment and seem to be in accordance with the naysayers who were taking potshots at the Euro even before its inception in 1999.

However, many critics ignore the euro area’s strengths. There is a need for clarification. Let me start by stressing some facts:

1. Since its inception almost 13 years ago, the euro area has experienced an unprecedented level of price stability.

2. The euro area has logged real per-capita income growth of around 1 percent a year since 1999, just below the U.S.’s 1.1 percent. Observers often look only at headline growth figures, where the difference is bigger. But the figures match once adjusted for population growth.

3. During the same period of time, the euro area has created 14 million jobs, six million more than the USA.

4. Contrary to common belief, the heterogeneity within the euro area is not significantly bigger than between U.S. states.

5. On a consolidated base public finances are in a much better shape than those of other major currency areas. The euro area as a whole will run a budget deficit of about 4.5 percent of gross domestic product this year. The International Monetary Fund (IMF) expects a U.S. budget shortfall of about 10 percent this year.

6. According to the IMF the aggregate debt-to-GDP for the euro area stands at 87 percent. For the US the debt-to-GDP ratio in 2011 is expected to be 100 percent.

7. The current account is broadly in balance, different from other advanced economies of similar size. For this year the IMF forecasts a current account deficit of 3 percent for the U.S.

Still, there is no room for complacency. The sovereign debt crisis in several Member States of the euro area and financial markets turmoil indicate that we are facing very challenging times.

To download the full speech (BIS)
To download the full speech (SWF Institute)



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