Rede in Bangkok
Thank you very much Governor Prasarn, distinguished guests. It is a great pleasure to be invited here to join you at this marvelous dinner and to deliver a short speech.
Ladies and gentlemen, these past few days have taken me to Tokyo where I attended, together with the Governor, the annual meeting of the International Monetary Fund, and then to Singapore. And now it is a special honor for me to conclude my Asian tour here in Bangkok.
I am especially pleased to be here this year – a year that marks the 150th anniversary of diplomatic relations between Thailand and Germany. Back in 1862, Count Friedrich Albrecht zu Eulenburg of Prussia headed a major diplomatic mission to East Asia where he signed a comprehensive “Treaty of Amity, Commerce and Navigation” with an emissary of Siam’s King Mongkut. You see, there is a big difference between then and now: now we have treaties of stability and growth, and so on.
Since then, relations between our two countries have flourished: Germany is Thailand’s most important European trading partner by far. There are more than 500 German businesses operating in Thailand, and our close relations also manifest themselves in economic cooperation, joint education and research projects, and a wide range of joint cultural projects. All this shows that Thailand and Germany’s partnership is highly beneficial to both sides.
However, ladies and gentlemen, I am not here tonight to talk about Thai-German relations. Instead I would like to focus on what two of the world’s foremost economic regions can learn from each other in the wake of the global financial and economic crisis that struck in 2008. Raising this debate from the national level to the supranational and international level is exactly the right thing to do. After all, one of the major consequences of globalization is that the nation-state has lost its regulatory monopoly. This is something the crisis brought home to us.
So what can Europe and Asia learn from one another? I would like to start my considerations with the 2008 crisis. As we know, market economies are the best system for fostering competition, growth and jobs. But what we learned again is that market economies need rules, and they need limits. Any human order without rules or limits is always in danger of destroying itself. That is one of the consequences of human nature. In 2008, financial markets came close to destroying themselves. Therefore, market economies need rules. All over Europe, in the late 1990s and in the early years of this century, the different political groups competed with each other in pushing deregulation forward, especially in the area of financial markets. When all this deregulation succeeded, we had too little regulation, and then we had to bear the consequences.
Against this backdrop, it is only right that critical questions are being asked about the efficiency of financial markets, and that the pendulum of international politics is swinging back towards a stronger state. After all, the idea of a self-regulating and permanently stable global economy is a pipe dream. Oil crises, dollar crises, debt crises, loan bubbles, real estate crises and, more recently, a global financial crisis of epic proportion have been our constant companions for the last 40 years. It is hardly surprising that the crises and their economic and social costs have been especially severe in the area where globalization has advanced the most: in the financial industry.
I remain convinced that we will overcome the major challenges of the 21st century only if we maintain the superior system of free markets, free competition and better resource allocation. Well-functioning financial markets are indispensable for the real economy. But I also share the view that the growing integration of the world’s economies in the 20th and 21st centuries, especially the conversions of what were formerly national financial markets, is gradually increasing our vulnerability to systemic crises. Such crises are not restricted to individual financial institutions, but in fact influence the soundness of national or even global financial markets and have an impact on the real economy in the countries affected – an impact on growth, prosperity and jobs. And that’s why we need a regulatory framework for our financial markets, in the knowledge that there is no going back to the days of segregated national financial markets. This does not mean that an obsession with the market should be replaced by an obsession with the state. One extreme is just as bad as the other. What is important is that we take level-headed decisions in this difficult policy area – and that we create a new regulatory framework for financial markets that restores confidence.
The G20 countries share the view that global crises require global solutions. That is why we have taken key decisions that will help us to overcome the worst financial and economic crisis since World War II, and to restructure the international financial architecture with the aim of preventing or at least mitigating future crises. However, the longer it looks like the crisis has been overcome, the more the pressure and willingness to take joint action seem to decline; and that is dangerous. If efforts to regulate global financial markets were to remain incomplete, we would ultimately expose the markets to the danger of destroying themselves again through excesses, as was nearly the case in 2008. These efforts have to take place on a global level, since any regulatory arbitrage would create disincentives and massive flows of capital into other markets which are so closely interlinked.
We do not see regulation as an end in itself. We support it because for us, the continental Europeans, one of the key lessons from the past crises is that high cyclical, credit- and profit-fuelled growth driven by financial markets does more harm than good. Instead, we need to create the conditions for sustained and sustainable growth on the basis of solid structural frameworks. By sustainable growth, I mean steady growth that is compatible with environmental and social priorities, without massive distortions and erratic volatility in the financial sector. I am convinced that this growth model has more advantages than a system which generates high growth rates when the economy is running well, but which fails to operate in downturns without government support to prop it up.
A permanently stable European currency is an indispensable part of this European growth model. As we discussed in Tokyo, and on several other occasions again and again, our conviction is that an excessive level of sovereign debt poses a risk to sustainability. Therefore I strongly believe in the research of Rogoff and Reinhart, for example, that as soon as you have reached a certain limit of sovereign indebtedness, increasing the deficit and the debt will not create more growth but will actually harm growth. For this reason, we have to know that if we want to achieve sustainable growth, we have to reduce sovereign debt in nearly all advanced economies.
In Tokyo, we saw figures from the International Monetary Fund on the debt level in advanced economies as of the end of World War II, which back then was about 130% in relation to GDP if I am right. The debt level went down to 30% of GDP by the mid-1960s and has now increased again to the level we had reached after World War II. Of course, the conditions for reducing this debt are much more difficult now than they used to be after World War II. Therefore, we have to know there is no choice but to reduce, in the medium term, overall indebtedness.
What we discuss again and again is how we can balance the necessary budget consolidation with sustainable growth and how not to damage growth in vulnerable European regions. We urgently need to boost job growth. But of course we have to keep in mind that it is not convincing if – in the medium term – you need to go a long way in one direction, but you start running in the opposite direction. That does not create confidence; that creates confusion. Our experience in Germany and all over Europe is that the most important thing for growth is confidence – confidence among investors and confidence among consumers.
Over the last couple of years we have been discussing the issue of imbalances at the global level, where there are deficits and surpluses. We are also having this discussion in Europe, where there are imbalances within the Monetary Union. We have always had that. If Germany is asked to create more domestic demand to correct the imbalances – which we in fact did over the last couple of years by the way – the most efficient instrument is not to spend additional public money that increases budget deficits. The most efficient engine – we have proven it – is to increase confidence among consumers. And long-term stability is the most efficient precondition for regaining confidence. Therefore, I think we have to know that if we want sustainability, we have to resolve our debt problem.
And we have to stick to what we agreed on in former years at the G20 level as well in a lot of IMF meetings: If we cannot limit liquidity in financial markets, we will risk another series of bubbles which will create new crises. Therefore, there is no other way to go. We have to stick to a path of consolidation in the medium term. That means we have to discuss this issue among the different parts of the world economy – advanced economies, emerging economies and the least developed economies. In the advanced economies, we will have lower growth rates than we need to have in emerging and developing countries. It has to be said very clearly that if we do so, we can discuss and we can agree at the global level on solutions that balance sustainable fiscal policy with policies for sustainable growth.
In Tokyo we also discussed another very important issue. We have to concentrate in the coming years – in both our global cooperation as well as our bilateral cooperation – on something we talked about at a very efficient and very well organized conference held by the Thai government today in Bangkok: the link between the real economy and the financial markets. Financial markets must not forget that their first duty is to serve the real economy. As the Indian Finance Minister told us in Tokyo – if I may quote him: “There was a major stock exchange event with the IPO of Facebook. But the creation of a thousand jobs by Facebook – although that is important – is by far not enough for India. What we need in India is jobs for the younger generation. We not only need the new very sophisticated service jobs, but we also need the traditional jobs in manufacturing, in teaching, in nursing and so on.” If we leave a young generation without hope, if we leave them in unemployment – which is the case in some major parts of the world – we will not have the best preconditions for global stability.
Therefore, we also have to think about the following: if the financial markets provide the best possibilities for making a lot of money in a short time, this may give young people the wrong incentives. The Governor of the Bank of England once told me something I have never forgotten. He said, “In London, the problem is that all the most talented students decide to become economists and lawyers, but we don’t have engineers in the UK. If we want to have a manufacturing industry, we also need engineers. Therefore we have to ask the question: Are we giving the right incentives, or do we tend to give the wrong incentives?”
I am only telling you these things to give you some ideas about what we should discuss between Asia and Europe. What can we learn from each other? In the end, all of this has to be done at the global level. Financial markets in particular are so tightly interlinked globally that without global solutions, we will always risk regulatory arbitrage and thus massive imbalances. So we have to work toward common global solutions. Regional cooperation makes a very important contribution to this process. Therefore, I try to convince the younger generation in Europe that European integration may be a very complex process, but if you take a long-term perspective, it is very successful. That is why we received the Nobel Peace Prize a couple of days ago. At the end of the ASEAN conference today, we were wishing that ASEAN would get the Nobel Peace Prize in a few years for your regional cooperation.
You cannot convince young people in Europe by telling them that European integration is needed to preserve peace, because young people do not believe that there will ever be another war in Europe – which, by the way, is a major success of European integration. But the fact is: If we want to make a reliable contribution to global stability in the 21st century, we have to improve European integration as a part of global governance. As I mentioned at the very beginning, I am convinced that the regulatory monopoly of the old-fashioned nation state is over. Therefore we have to find a new model for global governance. Regional cooperation can and must make a contribution to this new form of global governance. We will have to find our way there through a process of trial and error, because there is not one specified model. We will have to proceed with more cooperation within and between the world regions. And we can learn from each other. That was a major outcome of today’s ASEAN conference as well.
I would like to add that – despite all the doubts, despite all the uncertainties and nervousness concerning the eurozone – there will be no turning back. All major European nation states which are part of the Monetary Union in Europe are determined to stick to the Monetary Union. Of course, Europe will remain complex. To be honest, it will always take time for us to reach the right decisions in Europe – it is true, it is unavoidable, it is complex. But I can assure you: We will deliver, step by step. We have achieved considerable progress over the past months and years, and we are committed to moving forward. We are on the right track.
I want to add just one example: the eurozone as a whole – you may not believe it, but it is true – has halved its deficit in relation to gross domestic product over the last three years. Europe has delivered what the advanced economies agreed at the Toronto and Seoul summits. We will make our common European currency stable and trusted. We are working on a better construction to complement the European common monetary policy with rules for a common European fiscal policy. Furthermore, we have improved the competitiveness of all the economies that belong to the Monetary Union, and these improvements are ongoing. The next step is that we will break the vicious circle between sovereign debt and financial institutions by creating a banking union, step by step. It will certainly take some time until the European banking supervision mechanism is in place, but we are on the right track. Because we are delivering what we promised, we will restore confidence in the euro and in the political structures of the Monetary Union.
Governor Prasarn, I have been told that you gave a speech in London last month about Asian lessons for Europe. In your remarks you rightly concluded that – I would like to quote – “crises provide a window of ‘political feasibility’ to undertake needed structural changes that may be hard to sell to the public in normal circumstances, so one should not waste a good crisis”. That is exactly why I am so optimistic that Europe will emerge from its current crisis stronger than before. I am always asked by journalists in Europe: “Why are you still optimistic with all these problems?” My answer is always: “The deeper the crisis, the better the chances.” And therefore you can trust in Europe. We have a deep crisis. Therefore, we have a key chance to make the changes we need and that we would not make under normal circumstances.
I would like to conclude by quoting a Thai proverb. Sometimes, after sitting through yet another endless meeting in Brussels – which is always much less comfortable than in Bangkok – and if you are a little tired and you feel that things aren’t moving quickly enough, then you can take comfort from this proverb from your country: “Turn your face to the sun and the shadows fall behind you”. Thank you very much!