Axel A Weber: Global imbalances - causes and challenges
Introductory remarks by Professor Axel A Weber, President of the Deutsche Bundesbank,
at the international conference "20 Years of Technical Central Bank Cooperation",
Eltville, Hesse, 28 October 2010.
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1. Introduction
Ladies and gentlemen
I am highly delighted to welcome you to this notable conference at the Bundesbank Training
Centre in Eltville. Central bankers and other officials from 42 countries have gathered here
today to discuss various experiences and common challenges. I would like to thank
Mr Thomas Gierenstein and Mr Jürgen Sterlepper as well as their team for organising this
conference.
We are holding it to celebrate 20 years of technical central bank cooperation within the
Bundesbank. While the Bundesbank has always been available to provide foreign central
banks with technical assistance, the momentous events of the early 1990s prompted the
Bank to institutionalise this kind of work.
It was, in particular, Hans Tietmeyer, my pre-predecesssor and Vice-President at the time
who was quick to grasp the far-reaching importance of those historic events for central
banking: the fall of the Iron Curtain, the collapse of the communist regimes in central and
eastern Europe, the subsequent transformation in those countries from a planned economy
to a market economy as well as the break-up of the Soviet Union and the resulting formation
of new, independent states. Many of those states had to start from scratch in establishing
their own national central banks. All things considered, there was a major and vital need for
central bank cooperation.
Hence, in the first few years of its existence, the activities of the Bundesbank's "Technical
Central Bank Cooperation" were very much focused on the process of restructuring the
banking system in those countries. This meant transforming formerly state-owned banks into
a two-tier banking system consisting of an independent central bank and profit-oriented
commercial banks.
Later on, activities were concentrated on helping central and east European countries to
navigate their way to the European Union. Seminars at the time were aimed, in particular, at
the smooth integration of the accession countries' central banks into the European System of
Central Banks. After this phase was successfully concluded with those countries' accession
to the EU, Central Bank Cooperation widened its scope in terms of its geographical reach
and activities. In the era of globalisation, cooperation among central banks has generally
become much closer. This is, of course, especially true of cooperation among major central
banks. But, given the importance of price stability, a well-functioning banking system and, let
us remember, central bank's macroeconomic expertise as a useful asset for other central
government bodies, we also consider it important to engage in a constant exchange of
expertise and knowledge with central banks of developing and emerging countries.
Most recently, the financial crisis has significantly affected the activities of Technical Central
Bank Cooperation - all the more so as the Bundesbank is a valued partner in dialogue in this
regard. In terms of its geographical scope, the activities of our Central Bank Cooperation
currently cover EU accession and candidate countries, successor states of the former Soviet
Union, central Asia and China. Furthermore, the Bundesbank is committed to continuing its
support for the Federal President's programme "Partnership with Africa". In sum, it is in
contact with almost 90 central banks - many of which are represented today at this
conference. Of course, the Bundesbank is not the only supplier in this field. We are therefore
especially pleased to welcome members of the counterparts of our own Technical Central
Bank Cooperation from the ECB and other central banks of the ESCB who are also attending
this conference.
Admittedly, exporting our "central bank philosophy" is a major motive behind our efforts in
this domain. Many of you will agree with me that central banks have become both the most
modern and most reliable public institutions in many developing, emerging and transformation
countries. The Bundesbank will therefore continue to actively cooperate with its partner
central banks. The first 20 years of the Bundesbank's Technical Central Bank Cooperation
are a story of success and I am confident that the story will go on.
2. Global imbalances
Globalisation and, therefore, greater macroeconomic interconnectedness have increased the
wealth of nations. Nevertheless, over the past decade, globalisation has also been
accompanied by growing current account and financial imbalances. While the financial crisis
has been associated with a narrowing of imbalances, recent data suggest that this
development has started to go into reverse, at least partially. In view of their global
importance, I would like to focus my remarks today on these global imbalances, and I am
looking forward to discussing these issues with this global forum afterwards.
Current account imbalances are not a bad thing per se. On the contrary, from the viewpoint
of a single national economy there may be good reasons for temporary surpluses or deficits.
A surplus or deficit merely reflects a discrepancy between domestic savings and investment.
For countries with an ageing population like Germany, it is a matter of rationality to save
more than to invest domestically since the number of investment projects with good
prospects is declining, whereas households want to maintain their level of consumption in old
age. Similarly, countries that export an exhaustible resource would be well advised to invest
some of the proceeds abroad so that future generations can benefit from the resources as
well. Current account surpluses will therefore fade out over the medium to long term and
probably eventually turn into deficits, as the accumulated net foreign assets are gradually
reduced.
On the other hand, countries that are catching up on economic development usually invest
more than they save. Given a wide variety of investment opportunities but scarce capital,
they rely on foreign inflows of funds. In such cases, temporary current account imbalances
are fundamentally unobjectionable.
By allowing economies to separate domestic absorption from output - which is, by definition,
not possible in closed economies - current account imbalances are welfare-enhancing since
consumption is smoothed over time and because capital flows from economies with net
savings to countries where the marginal return on investment is higher. This, however,
requires a productive use of the capital inflows in the deficit countries. Overall welfare will be
adversely affected, for example, if capital inflows mainly fuel a speculative housing bubble. It
has now become obvious that unproductive use of foreign capital was widespread in the
years prior to the financial crisis and that several countries have been living beyond their
means.
Regarding the debate on whether global imbalances were among the causes of the financial
crisis, I do not, however, consider them to have triggered the crisis. Rather, I think that
deficiencies in the financial system were at the core of the crisis, whereas global imbalances
intensified and accelerated the resulting chain of events.
Indeed, many of the persistent high current account positions that have emerged over the
past decade are neither benign nor sustainable. The large U.S. deficit is due, first and
foremost, to low national savings. On the other hand, the current account surpluses of major
emerging economies are, to a significant degree, the outcome of exchange rate policies that
helped merchandise exports to grow. Rather than investing the financial surpluses
domestically, China, in particular, continues to accumulate substantial foreign exchange
reserves - mainly denominated in US dollars. Whilst this may possibly be not irrational from
the surplus country's point of view, it is partly responsible for making the global economy
more vulnerable to adverse shocks.
The recent financial and economic crisis has caused a sharp decline in current account
positions. The U.S. current account deficit - which in absolute terms is still largest of the
world - decreased significantly from 6.0% of GDP in 2006 to 2.7% in 2009. The Chinese
surplus, which peaked in 2007 at 10.6%, will go down to 4.7% this year according to the
most recent IMF projections. However, in contrast to the U.S. current account deficit, which
the IMF expects to increase only slightly over the next years, the Chinese surplus - in
absolute terms the largest - is projected to re-increase significantly, to nearly 8% of GDP in
2015. The current account surpluses of oil-exporting countries, which more than halved
owing to lower oil prices, are also expected to re-increase, although nowhere near to the
precrisis levels. In the case of China and the oil-exporting countries, the recent narrowing of
current account positions was due mostly to cyclical adjustment. In the United States,
however, cyclical factors have played a less important role with regard to the recent decline
than permanent factors such as a structural upward shift in the private savings ratio.
The current account of the euro area has been quite balanced over the past decade and
continues to be so. The position deteriorated slightly and turned negative in 2008.
Nevertheless, it is fluctuating around 0% and is not forecast to increase significantly over the
coming years. Therefore, the euro area and its economies have not contributed to global
imbalances. This overall figure, however, masks economic divergences within the euro area.
Large and persistent current account deficits in a number of countries on the geographical
periphery of the euro area are the result of a combination of strong growth in demand, higher
than average inflation and deteriorations in price competitiveness during the first decade of
monetary union. Hence, the underlying distortions that led to these external imbalances were
mainly domestic in nature - unsustainable developments, as was recently revealed by the
financial and economic crisis. While their impact on global imbalances is rather limited, major
macroeconomic imbalances within the euro area have proven to be a hazard for the single
currency area as a whole.
When it comes to correcting intra-euro area macroeconomic imbalances, the bulk of
structural adjustments has to be undertaken by the deficit countries themselves as it was
there that domestic developments became unsustainable in the years prior to the crisis.
Although the crisis has led to a correction that is not just cyclical, including a cooling-off of
housing markets, it is of great importance for the euro-area economy that the adjustment
process in the deficit countries continues. Against this background, compensatory measures
taken by euro-area countries with current account surpluses, like wage increases or a more
expansionary fiscal policy stance, would be neither necessary nor helpful. Furthermore, it
has to be stressed that Germany's current account surplus, for example, is the result of
decentralised market processes. This is an important difference between EMU surplus
countries and some emerging economies where a market-driven correction of imbalances is
significantly hampered by policy interventions.
To sum up, as the underlying causes of global imbalances are mainly still operative,
imbalances are continuing to pose risks to the global economy and are incompatible with the
G20's goal of strong, balanced and sustainable growth. The financial and economic crisis
has not removed global rebalancing from the global policy agenda. Pre-crisis policy advice is
still largely relevant. While global rebalancing may have become even more challenging
- even more so as major economies have not yet fully digested the recent crisis - it is
encouraging that global leaders have acknowledged the importance of the issue.
The G20 "Framework for strong, sustainable and balanced growth" is a sometimes tedious,
but important advance in this regard. In contrast to the multilateral consultations that were
held in 2006 and 2007, the G20 commitments are backed by the leaders and include all
major stakeholders. Furthermore, the Mutual Assessment Process could provide the
opportunity for exerting peer pressure among members, which is considered to be more
effective than institutional surveillance.
Still, we should not rely too much on the effectiveness of the framework itself. At the end of
the day, it is up to the national authorities to implement the necessary measures in order to
reduce imbalances.
Emerging surplus countries as well as oil-exporting countries should pursue measures to
increase domestic demand. In some cases, in particular China, it is a well-known fact that
more flexible exchange rate regimes would help redirect growth from export to stronger
domestic demand. At the Toronto Summit, emerging surplus economies agreed to undertake
reforms to enhance exchange rate flexibility. Market-oriented exchange rates that reflect
underlying economic fundamentals contribute to global economic stability. Therefore, the
recent appreciation of the Chinese renminbi is a welcome further step towards appropriate
valuation.
Higher exchange rate flexibility should, however, be supplemented by structural reforms,
especially as their positive impact is more sustainable. In the case of China, this includes, for
example, measures to reduce precautionary household saving by improving social security
or measures to strengthen corporate finance.
The advanced G-20 states have pledged to halve their public deficits by 2013 and to stabilise
their debt ratios by 2016. The deficit countries among them have committed themselves,
beyond budget consolidation, to supporting private savings, to strengthening their export
sectors and to maintaining open markets. In the United States, private savings have already
increased, whereas the public deficit is still high. Budget consolidation will be challenging but
will be good for the U.S. and help rebalance the global economy.
The surplus countries, in turn, have committed themselves to strengthening domestic
sources of growth, in particular by implementing structural reforms depending on national
circumstances. Germany is a case in point. Comprehensive and sometimes painful labour
market reforms have helped to make the labour market significantly more flexible. The
dividend from these structural reforms was a robust labour market during the downturn,
implying comparatively robust private consumption. Meanwhile, the unemployment rate has
gone back down below its pre-crisis level and economic growth is increasingly based on
domestic demand. Boosting demand by means of further macroeconomic stimulus measures
would, however, be inappropriate and, at least in the case of Germany, highly procyclical.
3. Conclusion
Let me conclude.
Global imbalances still pose significant risks to the global economy. The unwinding of global
imbalances is therefore one of the major challenges on the global policy agenda. It is a joint
task of surplus and deficit, of advanced and emerging economies.
Thank you for your attention.