But it also highlights the continuing importance of product market reforms, such as completing the single market, which open up services markets to competition. This would encourage intra-sector reallocation among the most productive firms. And by making services more tradable, it would mean that employment growth in that sector would also contribute to rebalancing. Second, despite the flow improvements, external imbalances in stock terms remain high. The net international investment position (NIIP) of most countries with large net foreign liabilities has stabilised, thanks to current account improvements. But it has not yet fallen towards safer levels. All five (former) programme countries still have a negative NIIP in excess of 90% of GDP, and in some cases much greater. The NIIP of major surplus countries, such as Germany and the Netherlands, has also continued to grow. That suggests further adjustment is still needed to achieve a sustainable external position. European Commission projections suggest that the NIIPs of Greece, Spain, Cyprus and Portugal will remain at levels associated with substantial external vulnerabilities over the next decade.8 To meet the threshold specified in the Macroeconomic Imbalances Procedure – which is an NIIP/GDP ratio of –35% over a 10-year period – each would have to make substantial improvements. It is also important to note that internal debt levels – the debt a country owes to itself – remain high as well in several countries. For example, in Spain more than 60% of public debt and 80% of private sector debt is held by Spanish residents.

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.