To his last days he remained unconvinced that Europe had fixed its problems, often berating colleagues at the G20 for the lack of progress. That was typical. Jim Flaherty was always forthright. He wouldn’t avoid a problem, hoping it would get better. On current projections it will take the euro area eight years to achieve the recovery that Canada secured in two. Tonight I would like to draw on Jim’s legacy to reflect on how the euro area could act to avoid another lost decade. This matters for Ireland, Europe and the UK. The euro area is the world’s second largest economy. 1 With 27% of global banking assets it is a key determinant of global financial stability. It is the UK’s largest trading partner and the single largest destination for UK foreign direct investment. The euro area would do well to live up to the Flaherty motto because, although there was monetary boldness last week, the currency union has been relatively timid in putting in place the other policies and, crucially, the institutions necessary to deliver sustainable prosperity for its citizens. Now is not the time for half measures. In all advanced economies, private investment is still being held back by a combination of modest demand prospects and lingering concerns of another major adverse shock. Nowhere are these impediments more severe than in the euro area.
For example, if national central counterparty is not a viable and efficient model for a small economy, then the cost of hedging would increase with higher risk weight under Basel III. Meanwhile, if derivatives are cleared overseas, through regional or global central counterparties, we need to consider implication for cross-border supervisory coordination, financial stability, and development of local financial market and competition. On a related issue of Dodd-Frank Act, restriction on proprietary trading of US bank could impact the liquidity of US dollar markets abroad, as well as liquidity of foreign government bond markets which are the back-bone of their monetary policy operation. Another key issue going forward is the balance of authority between Home and Host regulators. There are concerns about the proposal of Financial Stability Board on cross-border resolution of Global Systemically Important Financial Institutions, or G-SIFIs. The concern is that some Host regulators may not be included by the Home regulator in the Crisis Management Group or resolution planning, even if the institution is systemically important in their jurisdictions. We are glad to see the FSB taking initiatives to identify potential problems. Now it is the time to work together on solutions in an inclusive manner. This is because the inclusiveness of the process assures acceptability and commitment, and reduces the uncertainty from unilateral action of individual countries. These international regulatory  2  BIS central bankers’ speeches  standards have no direct international enforcement power.