Publication Date

6-18-2013

Description

It is a matter of honour and privilege for me to be invited to share my thoughts with this august gathering of SAARC Governors. I wish to thank the Governor State Bank of Pakistan Mr. Yasin Anwar for providing me this opportunity. I would like to begin by briefly tracing the origin of the crisis of 2008/09 and then presenting the evidence about the changing role of Emerging and Developing Economies (EDEs) in the aftermath of the crisis. I would then turn to the subset of SAARC countries and see as to how much they were affected by this crisis. Finally, I would like to end by advancing some thoughts about the future of the EU and its impact on the economies of SAARC countries. The rationale for setting up a common currency area – was premised on the belief that “Single currency itself would bring about an endogenous convergence. As it allowed goods and labor to move around the Eurozone more freely, that convergence would make the members better able to cope with a single monetary policy and the loss of exchange rate flexibility”. This proposition did not prove right as instead of converging, Northern and Southern Europe diverged. The crisis since 2008/09 is in fact rooted in this divergence. As member countries were stripped of currency and inflation risk, interest rates in the Southern Europe plunged to unprecedented low levels that spurred a great deal of cross border borrowing feeding construction booms in Spain, Ireland. In Italy and Portugal, lower borrowing costs propped up demand. Governments could drop the austerity they had pushed earlier to meet the fiscal entry demands. Peripheral countries lost an alarming amount of competitiveness as foreign capital poured into non-traded sectors and tradable sectors became uncompetitive.

Notes

Keynote address at the SAARC Governor Symposium, Islamabad on June 18, 2013

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