The last two months have brought important changes to the world economy. Growth perspectives in advanced economies have significantly worsened, markets are increasingly volatile, and confidence indices have fallen. The continued downward revision of US growth performance has certainly played a role. But, most significantly, two almost simultaneous shocks have occurred: in the US, reaching an agreement to raise the debt ceiling has met with considerable difficulties; and, in Europe, it has been recognized that Greece, a euro and OECD country, would not be able to fully honor its signature, unless there is voluntary private sector involvement in its refinancing. In the eyes of the market, this has had significant implications for other peripheral European sovereigns. Overall, doubts have been cast on the ability of major advanced countries to pay back their sovereign debt. In different ways, to differing degrees and with opposite consequences, the same question is now being asked on both sides of the Atlantic: what kind of risk is attached to sovereign debt? We used to think of public debt in major countries as a riskless asset. Not anymore, not to the same extent. In that sense, a true regime change has occurred, with deep and long-lasting consequences, upon which I will try and reflect today. Much what I will say, of course, relates to Europe. But I will also adopt a more global perspective. Over the last 70 years, financial markets have developed on a strong, albeit implicit, assumption. Public debt in advanced economies was considered risk free.
In these turbulent times, Europe has a special role and a special responsibility. We are at the epicenter of the crisis and very much aware of the necessity to take and implement the appropriate decisions. Like in 2009, however, the crisis itself is more global in nature. A new uncertainty has been created and the interaction between markets and governments has become more complex and more dangerous. We live in democracies and have to accept that political decisions follow their own process and obey their own constraints. In all our countries, rising public debt and the unstable state of public finances is creating enormous anxiety, which, in turn, makes it more difficult to reach the necessary decisions. There are, however, good reasons for optimism. On the supply side, our economies are robust and dynamic. Corporate balance sheets are very strong. Emerging economies are well placed to enjoy strong and sustainable growth in the years to come. Above all, the community of nations seems ready to face the extraordinary challenges we are confronted with. Coming back from the IMF-World Bank Annual Meetings, I am struck by the spirit of cohesion and the willingness to cooperate that has been displayed by all participants. As you well know, central banks themselves are constantly cooperating in monitoring the situation and acting when necessary, as they have done recently to provide dollar funding to international banks. This spirit of cohesion is our best asset in the current environment.