Key challenges and prospect for the world and domestic economy We meet today at the time when the international economic and financial environment has become immensely more challenging. To a large extent, this has been due to the significantly higher degree of uncertainty that has prevailed on several fronts in the world today. Firstly, is the uncertainty about the prospects for global growth in the aftermath of the Global Financial Crisis. The persistence of this uncertainty is now having its implication on sentiment and confidence. Secondly, are the conditions in the commodity and financial markets that have become more volatile. The massive shifts in global liquidity are precipitating volatile capital flows with its immense implications on the asset and foreign exchange markets. Thirdly, is the increased uncertainty prevailing in the policy environment in the global economy in terms of the extent and timing of policy changes. In particular, is the uncertainty with respect to the timing of the exit from the highly accommodative policies and the implications of the divergent monetary policy stance that are being pursued in the major economies. Fourthly, is the uncertainty related to the implementation of the structural reforms to address the structural rigidities and deficiencies that surfaced during the Global Financial Crisis. Fifth and finally, are also considerable geopolitical uncertainties prevailing in the world today. Cumulatively, these developments have compounded the uncertainties surrounding the global economy. In this environment of great uncertainty, a more moderate recovery of the global economy has been projected for 2015.
There is no doubt that these developments will have a dampening effect on the world economy. However, their precise impact is difficult to measure at the current juncture. On the one hand, economic and model-based analysis still suggests only moderate effects on prices and output in the euro area. This is due to the fact that, first, most of the crisis regions are quite small in economic terms, i.e. when compared with world GDP or their contribution to world trade. Second, trade links between these countries and the euro area are also of limited size. Third, the euro area itself is a very large economy, which is only directly exposed to variations in global trade to a certain degree. However, on the other hand, this analysis should not mislead us. We are perfectly aware that the risks associated with current global developments go beyond those effects which we can measure directly. In this respect one may think of indirect influences resulting from changes in confidence, saving and expenditure BIS Review 72/1998  -2-  within the euro area. We have to take these risks seriously and analyse the situation soberly, but we should also not dramatise. Let me now turn to the latest available data. These seem to indicate that economic expansion within the euro area has remained broadly on track, despite the worsening of the external environment. Domestic demand remains strong, while the contribution to growth from net exports has declined.