FRANKFURT (MNI) – The global economy is on an uneven recovery path
overshadowed by the risk of a sudden swing in capital flows, European
Central Bank Governing Council member Mario Draghi said Monday.

In a speech delivered at Vatican City, the head of the Bank of
Italy, which provided a text of his remarks, emphasized the importance
of financial system reform, especially given the absence of further
leeway for monetary and fiscal policy to stem any renewed economic slump
such as a reversal in capital flows could potentially provoke.

“We have succeeded in stabilising the financial system, and the
global economy looks set to be on a path to recovery,” he said. “This
will be an uneven recovery, with Asia and Latin America growing
substantially faster than Europe and North America, each of which must
address large fiscal challenges in the years ahead.”

Uneven growth will go hand in hand with large cross-border capital
flows, especially into promising emerging markets economies, he said.
Flows that cannot be absorbed will have to find a home in industrialized
economies, where they will help finance large debts, he said.

The modest unwinding of global payment imbalances during the crisis
will probably not continue, he suggested. The associated accumulation of
sizeable net foreign liability could threaten the global economy, he
said.

Capital account adjustments can in general occur “disturbingly
quickly” and bring about “very high economic, financial and social
costs,” he said. “This is the situation in Greece today. There are other
countries around the world that absent precautionary adjustment are at
similar risk.”

“The possibility of a sudden reversal is high, as the situation in
Greece demonstrates,” Draghi warned. “If economic conditions deteriorate
and we have not reformed the financial system, then we will face the
risk of a renewed downward spiral.”

He continued: “Options for further monetary and fiscal easing are
limited — perhaps non-existent. The resilience of the financial system
is thus critical to the sustainability of the recovery.”

–Frankfurt bureau tel.: +49-69 720142. Email: dbarwick@marketnews.com

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