8 They call for improvements in both the preventive and corrective arms of the Stability and Growth Pact, more emphasis on debt  6  European Commission European Economic Forecast, Spring 2010. 7  European Commission European Economic Forecast, Spring 2010, page 118. 8  EC Document COM (2101) 250, entitled Reinforcing economic policy coordination published on 12 May 2010. BIS Review 73/2010  3  sustainability and the extension of peer surveillance beyond the budgetary dimension to other macroeconomic imbalances, such as losses in competitiveness, asset price booms fuelled by excessive credit growth and rigidities in product and labour markets. While Malta’s situation is clearly less worrisome than that of some of the peripheral euro area countries, these proposals would benefit our economy as well. The persistence of current account deficits, for example, suggests an erosion of competitiveness and, therefore, the need for higher productivity, the removal of remaining constraints on market efficiency and increased investment in high value added, export-oriented activities. Indeed, the economy’s strong performance up to 2006 owed more to domestic consumption than to exports. Export growth, upon which the sustainability of a small, open economy depends to a large extent, has been insufficient over the past decade, and the consequent loss of market share partly explains why Malta’s income gap with the euro area has not narrowed in recent years. With regard to the internal imbalance, the events of the last two years have brought to a halt the substantial fiscal consolidation that was achieved in the run-up to euro adoption.
One policy under consideration is the macroprudential use of margin and haircut requirements.14 Setting margins and haircuts in a conservative or countercyclical manner may help to contain the excessive build-up of leverage. In addition to “leaning against the wind”, margin and haircut requirements can also improve financial stability by mitigating illiquidity spirals.15 This is particularly important given that an imbalance between the demand for and supply of liquidity could amplify or transmit shocks through the financial system. Conclusion Let me conclude. Since the ESRB’s foundation, Europe has strengthened its regulatory, supervisory, and crisis management frameworks. The ESRB has contributed to building a rich set of macroprudential policy tools for banks,16 and continues to coordinate the calibration of those policies. The European financial system has thus become more resilient, with greater loss-absorbing capacity. The financial system is also adaptive. Its adaptability is a strength, helping it to meet the challenges of the current environment. But it also means that policymakers must remain vigilant. The need for vigilance is why the ESRB has always warned against policy inaction bias. Macroprudential policy is still in its formative years, and policymakers are understandably cautious about deploying novel instruments. But when we see systemic risks, we should act. Greater risk arises from inaction. So as you listen to the presentations at this conference, think about the implications for macroprudential policy in a changing world. Is the macroprudential policy stance appropriate? Are the tools at our disposal effective?