This follows from Macroeconomics 101: the current account position is the mirror image of the balance of savings and investment. External rebalancing achieved through, for example, raising savings and depressing domestic investment, might not be compatible with robust growth or high levels of employment. The second aspect is the interaction between flows and stocks. Rebalancing has traditionally been seen as resolving flow imbalances, e.g. the current account. But it is also about sustaining sufficient flows over time to stabilise stock imbalances. That is because, even with a balanced current account, excessive net external liabilities create instability and may be unsustainable. And as is the case today in many euro area economies, an internal debt overhang slows down the economic recovery and hence impedes internal rebalancing. BIS central bankers’ speeches  1  The third aspect is the role of surplus and deficit countries. Rebalancing could, in theory, be achieved by all euro area countries adjusting vis-à-vis the rest of the world. But, in reality, as 50% of euro area trade is intra-area, it must involve rebalancing within the euro area as well. And to be sustainable, that rebalancing cannot take place solely through demand depression in deficit countries in a way that prevents their internal balance. It requires symmetrical adjustment in surplus countries too. “Symmetrical”, of course, does not mean that all countries should have a perfectly balanced current account, but rather that both excessive deficits and excessive surpluses should be adjusted. The fourth aspect is the cyclical and structural drivers of rebalancing.

Another factor in favour of focusing on productivity is that the types of reforms that will deliver productivity growth are likely to have less negative effects when monetary policy is at the lower  9  See Cœuré, B. (2014), “Structural reforms: learning the right lessons from the crisis”, keynote speech at the Economic conference, Latvijas Banka, Riga, 17 October. 10  See https://www.imf.org/external/pubs/ft/sdn/2015/sdn1522.pdf. BIS central bankers’ speeches  5  bound. That is because they act more on fixed costs than marginal costs, and hence have less impact on prices and real rates. For example, measures such as judicial reform or opening up closed professions are likely to primarily boost investment – and hence productivity – with little disinflationary effect. For all these reasons, and as I have said on several occasions11, seeing rebalancing as all about cutting costs – which is what policymakers often think of as “competitiveness” – is misguided. Productivity growth is central to competitiveness and to growing out of debt. This is confirmed by the IMF exercise I just mentioned: the benefits of wage moderation diminish as more countries engage in it, whereas if all countries engage in structural reforms to raise productivity the benefits are large and uniform. Among the structural reforms that reduce fixed costs, one that is likely to have the strongest impact in the current environment is improving insolvency regimes. This would help tackle the debt overhang for viable firms by reducing the costs of debt workout.