may also precede financial crises in advanced economies, 3 including in the euro area. i will structure the rest of my talk as follows. first i will talk about the determinants of the current account, focusing on the role of the exchange rate. in the second part i will say a few words about the composition of external funding ( gross and net capital flows ). finally i will conclude with a discussion of available policy options that could address the persistence of current account imbalances, globally and within the euro area. * * * 1. the determinants of global imbalances, and their adjustment mechanisms the economic and social costs of correcting current account imbalances are potentially dramatic. the macroeconomic effects of a transfer of resources from debtor to creditor 1 / 5 bis central bankers'speeches countries is an old issue, going back to the debate between keynes and ohlin about germany ’ s international obligations after world war i. in recent decades, maury obstfeld and ken rogoff 4 have pointed out in a series of papers that the basic mechanism of the adjustment results in a transfer of real resources from debtor countries to surplus countries, regardless of the drivers of global rebalancing. in the debtor country, there is a clear macroeconomic cost related to a drop in domestic spending and welfare, leading to large negative output gaps and high unemployment rates, and in turn putting strong downward pressures on wages. this is typically what we saw in the euro area, where the adjustment contributed to the very different dynamics of unit labour costs across countries [ slide 5 ], and therefore led to relative price adjustments. in cumulative terms since 2007, germany has seen real exchange rate appreciation of about 8 % relative to france, and 20 % relative to spain, although we should take into account in these dynamics the large gains in german competitiveness before the crisis. the adjustment relied mainly on nominal adjustment in deficit countries. the link between the current account and the real exchange rate is still subject to considerable debate among academics. if we look at a simple scatter plot showing how current account variations and real exchange rate variations have been related since the early 2000s [ slide 6 ], the conclusion is quite pessimistic : over this period, yearly variations in the real exchange rate have only been weakly negatively related to current account adjustments. one interpretation, however, is that a rebalancing requires large real exchange rate variations and therefore implies large costs in terms of welfare for deficit

francois villeroy de galhau : external imbalances - challenges and policy responses speech by mr francois villeroy de galhau, governor of the bank of france, at the " financial globalisation " conference, central bank of ireland symposium, dublin, 2 february 2018. * * * accompanying slides speech elaborated with the contributions of antoine berthou, matthieu bussiere, laurent ferrara, sophie haincourt, francesco pappada and julia schmidt ladies and gentlemen, first and foremost, i would like to congratulate the central bank of ireland on the 75th anniversary of its creation, and especially my colleague and friend governor philip lane. i am delighted to be part of this conference dedicated to “ financial globalisation ”, with such distinguished speakers and panellists. i would like to share with you a few thoughts on global current account imbalances and in doing so i will take mostly a policy perspective. the stylised facts are well known so i will be brief [ slide2 ]. starting from the late 1990s, the world economy was characterised by very substantial growth in global current account imbalances. despite a process of rebalancing and short - term movements mainly related to commodity prices that started with the great recession in 2008 – 09, these imbalances have remained large and persistent. consequently, net international positions have continued to increase [ slide 3 ]. the euro area is one of the regions where developments have been particularly striking [ slide 4 ]. although countries such as spain or italy have rebalanced their current accounts, imbalances still persist, mostly due to the large surpluses of germany and the netherlands. but why should we care about these imbalances? after all, there is no reason why all countries in the world should be balanced at all times, as these imbalances simply reflect the need for funding current or future consumption and investment. however, excessive external imbalances may become a source of concernbecause the funding of deficit countries by surplus economies is subject to “ sudden stops ” and even reversals. 1 experience suggests that large imbalances are often a leading indicator of subsequent crises and sudden stops. as shown by philip lane in one of his numerous contributions to this topic, 2 current account balances prior to the great financial crisis exceeded levels consistent with underlying economic fundamentals and thus implied large and costly adjustments thereafter. these vulnerabilities are not confined to emerging market economies : large and persistent current account deficits