But after the series of new shocks during last summer – Russia, LTCM, the deepening recession in Japan and the worsening position in Brazil – the prospects, at around the time of the IMF meetings in Washington last autumn, were looking pretty bleak. Now I would completely destroy my reputation as a central banker if I were to suggest that we are out of the woods. But the darkest financial storm clouds have lifted a little since the Fund meetings. The US Congress finally approved more resources for the IMF, the threat of a credit crunch extending to the industrial economies in the wake of LTCM receded, helped also by an easing of monetary policy in Europe as well as in the United States. In Asia, Japan took more determined policy action to address the fragility of the banking system and to stimulate domestic demand; the yen strengthened; China and Hong Kong both remained admirably resolute; and there have even been some encouraging signs of renewed capital inflows to some of the Asian countries. The floating of the exchange rate in Brazil last month inevitably increased concerns about emerging market instability, but it is encouraging that adverse effects on other markets have so far been limited. BIS Review 17/1999  –3–  There may be further particular setbacks, as far as the overall financial situation is concerned, but I think I can confidently say that if it doesn’t get any worse it is likely to get better.
It is important that macroeconomic imbalances should be avoided and that a critical mass of structural reforms should support a sustainable growth path. This lesson holds particularly true for the emerging economies. Over the past several years, I have repeatedly pointed out in my speeches that convergence with the EU along with maintaining macroeconomic stability is the major challenge facing Romania. In recent years, fast-track economic growth drew on external saving. Banks became dependent on external financing and the current account deficit exceeded the sustainability limits, which caused the Romanian economy to grow vulnerable. The global crisis fostered this vulnerability which translated into a marked economic slowdown. Today it has become clear that the natural bias towards speeding up real convergence needs to be balanced by the need to ensure a sustainable convergence process. The NBR has repeatedly warned against the pro-cyclical nature of the fiscal policy, which added to excess demand. We should learn the lesson that allowing wide budget  4  BIS Review 56/2009  deficits while the economy is expanding ends in failure. It would have been much easier today for us to find the means to weather the crisis if our budget had been on a surplus over a two-year period prior to the unleashing of the crisis. 9. The adoption of the euro cannot be a substitute for the need of domestic policy adjustment. This lesson became clearer at the moment emerging economies were hit by the economic crisis.