The solutions given by The National Bank of Romania to the international financial crisis and their effect Author: Horia Mircea Botoş

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What to learn from the crisis

In Romania, the international crisis is manifesting an increase in its imported character. As I said above, the crisis has 5 dimensions: the GDP, the inflation, the exchange rates, the confidence in the financial system and taxation. These dimensions brought up to attention the 9 things that any country has to learn about the crisis, according to what Governor Mugur Isarescu said in his speech at the Romanian Academy.

In return I will list these lessons, and I express my views on them:

1. Low level of inflation is not a sufficient condition for ensuring financial stability on long term - inflation was always a factor of instability, which is well exemplified by the crisis of the '30. The crisis if a careful review of the inflation after nearly 20 years of low and relatively stability, the funny thing is the coexistence of inflation and abundant liquidity in this period. As is well known, the crisis has its origins in the American subprime crisis, with then expanded on an international level. In my opinion fiscal and monetary policy must work together, both recording a too high relaxation in terms of regulations and systems of supervision.

2. Regulation and supervision remain behind markets evolution. The word that characterized the international economic world in recent years has been innovative. This feature has caused the markets to be increasingly difficult to regulated, not even discussing about the difficulties raised in supervision. When talking about markets we understand the production of goods and services, and also understand financial markets. The inability to control the markets was one of the main topics of discussion on the meeting agenda G20 member countries.

3. EU lack of institutions. Following the de Larosiere report, conclusion of that financial supervision must be restructured, considering that the two major areas to be considered are: macroprudencial and micropridencial monitoring and supervision. Institutions that will require the establishment are: Council of systemic risk (CSR), the European System of Financial Supervision, the European Banking Authority, European Securities Commission and the European Insurance Security Committee. It should also be mentioned that the three institutions will be receiving authority from the CSR and will report back to it. It is hoped that these institutions will respond properly and that they will be able to perform macroprudencial supervision.

4. Wage incentives in private companies are not adequately linked with risk management. The increase will give employees an incentive, giving them more a competitive edge and dynamics. Both are welcome, because the labour market is heavily exploited the ability of employees risk management. This is also recommended by the Basle 2 agreement.

5. People forget the crisis occurrence in periods of prosperity and neglect the conception of crisis management plans. The emergence of financial crisis is a phenomenon that is not very often. This in my opinion was recently forgotten by the United States, although they had been hit by such crises in the years '30 and then the oil crisis in the'80s, but they chose to ignore the signals.

6. IMF has an increased role after it was criticized as not provision of the Asian crisis. Although in past years on the international level of the IMF considered being in decline, but the crisis has demonstrated the importance of this organization. In the future the IMF is recommended a closer collaboration with the Financial Stability Board (FSB). The Forum has a seniority of 50 years and includes 185 countries, experience, reputation and its analytical capabilities are well developed and will once again demonstrate the applicability.

7. Expansionist measures are accompanied by the beginning of the exiting strategy, but the side effects are felt especially on inflation and economic growth. This means that besides the ‘Output prices of the crises must be accompanied by a growing dimension of trust in the economical and financial environments.

8. It is important to avoid macroeconomic imbalances slopes and to a sustainable growth supported by a substantial degree of structural reforms. In Romania, banks are too dependent on the capitals injection from abroad. They had to resist a big hit at the beginning of the crisis, mainly from the perspective of cash assets that have not only affected the economy, but also a primary consideration: trust. NBR warned many times about the procyclical fiscal policy of the Romanian environment, which has led to a further increase and some how unexplained of the command. In our country it was said several times that the only alternatives of attenuating the effects of the crisis would have been the efficient use of state budget or the significant increase of these.

9. Adoption of the euro can not substitute for policy adjustments, this being shown by the emerging economies developments. In our country continues to show that the National currency suffered an undue appreciation, market needing and demanding corrective action that took place. High rate of indebtedness and increased volatility of markets led to the idea that the only option to escape is the adoption of the euro, both to adjust monetary and taxation policies. But adopting of the unions currency at this time would cause some major economical problems and long term imbalances for our country, facing which would be were difficult at this moment.

The 9 lessons, as are called, can be divided in two: 7 lessons generally valid for all countries of the European Union, and the last 2 which focus on developments of emerging countries, as our country.

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