Speech by the Governor George A. Provopoulos at the Annual Meeting of the IMF 6-7 October 2009
06/10/2009 - Speeches
The global economy is now emerging from its most severe
crisis since the Great Depression of the 1930s. Why was this crisis so severe?
Because the financial system was at its epicenter, the ramifications of the
crisis were quickly transmitted to all sectors and countries. The effects of the
crisis were magnified by a collapse in business and consumer confidence. History
shows that financial crises are more likely to be followed by severe economic
downturns when they are centered in the banking system and occur in the context
of rapid build-ups of credit and fast-rising asset prices. This has also been
the case with the present crisis.
The policy responses to the crisis have been rapid, bold, and
unprecedented. These responses reduced uncertainty and improved economic
With the global recovery in its initial stages, and economic
activity still far below pre-crisis levels, it is too soon to begin withdrawing
the stimulus measures. However, the formulation of a medium-term macroeconomic
framework for the post-crisis period will be crucial. It will facilitate the
achievement and maintenance of a sound fiscal position and enhance the ability
of the monetary authorities to deliver price stability. It will also help foster
financial stability. The challenge will be to choose the correct timing for the
withdrawal so as to avoid: first, a premature unwinding of public interventions;
second, jeopardizing what has been achieved in stabilizing economic and
financial conditions; third, letting these measures continue for too long, at
the risk of distorting incentives and damaging public balance sheets.
Safeguarding the sustainability of public finances will be a key objective in
many advanced economies, the deficit and debt ratios of which have reached
levels unseen in peacetime.
The IMF has played a key role in helping the global economy
weather the storm. The tripling of IMF resources has significantly increased the
Fund’s lending capacity, and the new SDR allocation has provided additional
liquidity to the global economy. At the same time, the launch of the Flexible
Credit Line will add flexibility to the Fund’s lending framework.
The best way to manage a crisis is to prevent it. The present
crisis has revealed that macro-prudential factors play an important role in
determining the size, nature, and propagation of systemic risk. Therefore, it is
essential to establish an effective framework for macro-prudential supervision
that will ensure both the systematic analysis of risks and the formulation of
policies to address such risks.
The state of the Greek economy
The economic slowdown has been less severe in Greece than in
many other European countries. However, this outcome reflects factors that, if
left untreated, will reduce growth potential in the medium term. Specifically,
the performance of the Greek economy during the crisis reflects the
relatively-low level of openness and the deterioration of public-sector balance
sheets from a position that was already worrisome prior to the onset of the
A factor that has, however, supported the Greek economy has
been the soundness of its banking system. Greek banks have been free of toxic
assets and their exposure to the emerging economies of South-Eastern Europe has
remained within manageable limits. A recent stress test conducted in close
cooperation with the IMF has reaffirmed the soundness of the Greek banking
The relatively-high growth rates experienced by the Greek
economy since its entry into the euro area reflect a catching-up process. To
sustain a robust growth rate in the future, Greece will need to address several
key challenges, reflected in persistently very large current-account imbalances,
high fiscal deficits, and worrisome debt levels. These imbalances are the result
of structural rigidities, which have undermined competitiveness over time. To
restore competitiveness and remove the imbalances, a dual agenda needs to be
concurrently implemented: first, a multi-year program of fiscal consolidation,
which can reduce risk premia and crowd-in private investment, raising the growth
potential of the economy; second, bold and wide-ranging institutional reforms in
the public sector and structural reforms in product and labor markets, which can
enhance productivity and raise the employment rate. Only by undertaking these
reforms will the Greek economy be able to become more competitive and increase
its growth potential and the prosperity of its citizens.
The broad support received by the newly-elected government
will greatly facilitate the implementation of the reform agenda.