Jean-Claude Trichet: Views on recent economic developments in the euro area and international financial architecture Address by Mr Jean-Claude Trichet, Governor of the Banque de France, at the Institute of International Finance Spring Membership Meeting held in Hong Kong on 1 June 2001. *  *  *  Ladies and Gentlemen, It’s a great pleasure for me to share some views with such a distinguished audience on two topics of great importance: the first one deals with recent economic developments in the euro area and the motivations of the last 25bps rate cut by the ECB on its 10 May’s meeting. The second point deals with the very important question of international financial architecture. Let me start with the first topic. The global outlook for 2001 continues to be characterised by sizeable uncertainties, amid the readjustments taking place in the American and Japanese economies, and their impact on the rest of the world. In the United States, however, while the GDP growth estimate for the first quarter of 2001 indicates that the slowdown has been substantial, the economy is still driven so far by firm consumer expenditure. Economic activity in the euro area in 2000 expanded at an annualised rate of 3.4%, the strongest growth since 1990, driven by buoyant domestic and foreign demand. The general outlook for this year and next one remains positive, even if, clearly, some impact of the American slowdown is already visible.

Higher-than-warranted balances remained centered in the euro area as a whole (driven by Germany and the Netherlands) and in other advanced economies (Korea, Singapore), while lower-than-warranted balances remained concentrated in the United Kingdom, the United States, and some emerging market economies (Argentina, Indonesia). China’s external position was assessed to be in line with fundamentals and desirable policies, as its current account surplus narrowed further, although achieving a lasting external rebalancing will require gradual reining in expansionary macroeconomic policies and adopting further structural reforms. The mirror image of the current account balances, are the financial flows. After the crisis, global map of financial flows changed, mostly due to the shift in the global financial conditions and relative growth differentials between emerging and advanced economies. Following quantitative easing programs in advanced economies in the aftermath of the global financial crisis, portfolio and other investment capital flows to emerging market and developing economies intensified, which, together with accommodative macroeconomic policies, contributed to currency appreciation pressures and larger current account deficits. These trends, however, 5  started to reverse beginning with the 2013 taper tantrum episode as growth differentials between advanced and emerging market economies narrowed and the prospects of monetary policy normalization in advanced economies gathered strength. Direct investment remained relatively stable and less sensitive to changes in global financial conditions and US dollar movements. Despite the narrowing of global current account imbalances, stock imbalances have continued to widen to reach record levels.