Worldwide financial transactions have recently increased dramatically. The daily volume of currency dealing alone equals the annual economic output of a medium-sized industrialised nation. The financial markets direct money where it can be most productively used.

Whenever a funding bottleneck develops somewhere in the world interest rates soar and attract capital. Developing and threshold countries offer particularly high returns as capital which can be used to fund projects and create jobs is scarcer there than in industrialised countries. The free flow of capital increases the prosperity even of those without assets. The money borrowed finances new plants and machinery which make labour more productive and raise wages. To attract capital, governments must create favourable investment conditions by improving infrastructure and promoting education.

For financial markets to be able to function there must be clear rules. Repeated financial crises have shown that markets can produce disastrous developments when the underlying structures are faulty. To prevent a damaging race between countries to offer ever laxer regulation and to avoid financial crises spilling across borders, the world’s nations must reach agreement on minimum standards and a global financial institution to monitor compliance.

Markus Demary

Markus Demary

Senior Economist for Monetary Policy and the Economics of the Financial Markets

Tel+49 221 4981-732

Maildemary@iwkoeln.de

@DemaryMarkus

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Jürgen Matthes

Jürgen Matthes

Head of the Research Unit International Economics and Economic Outlook

Tel+49 221 4981-754

Mailmatthes@iwkoeln.de

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