therefore, restoring the sustainability of public finances is key in the quest for a sustainable growth path – across the world, but particularly within the euro area. with the stability and growth pact ( sgp ), and especially its debt criterion, the euro area already possesses the right instrument. yet, implementation has been slack to date. the sgp ’ s rules need to be tightened – in its preventive arm as well as in its corrective arm – and measures must be taken to ensure that member states abide by them. at the end of october the european council adopted proposals to change the sgp. these changes would be an improvement compared to the status quo. however, a firm establishment is still to come and, judging from past experience, we would have wished for more far - reaching suggestions. alongside the changes of the fiscal framework a more intensive macroeconomic surveillance is to be installed to diagnose erroneous developments early on. this reflects that especially the countries hit hardest by the debt crisis have posted persistent current account deficits. still, the focus on the current account can easily lead to the wrong conclusions. even persistent and sizable current account positions are not a problem in themselves. technically, a surplus or deficit reflects the difference between domestic saving and investment. for countries with an ageing population it is only rational to save more today rather than invest domestically, as the number of profitable investments is declining and households want to maintain their level of consumption in old age. conversely, countries that are catching up in terms of economic development have ample opportunities for investment but are short of domestic capital. by allowing economies to separate domestic absorption from output, current account imbalances enhance welfare. consumption is smoothed over time and capital directed into its most efficient use. however, current account imbalances are less benign when they are caused by distortions. when they reflect underlying barriers to economic growth they can add an element of instability, not only domestically but also in other economies. a number of deficit countries did not always invest capital inflows efficiently. in some cases, this allocation increased domestic demand and, with inflexible labour markets, wages outpaced productivity. the results were a loss in price competitiveness and a further widening of the current account deficit. here macroeconomic surveillance could help detect problematic developments with the potential to destabilise the currency union as a whole at an early stage. this is particularly important in cases when these developments are not immediately reflected in deteriorating public finances which would already

a degree that a small distortion at one end of the world can quickly spread and affect the entire system. in 2008, the failure of a single investment bank in the united states sparked a global financial crisis and a worldwide recession. having acknowledged that financial crises today are global in scope, the g20 embarked on an ambitious agenda to reform global financial regulation. and they have made significant progress. the new basel iii rules will ensure that banks hold more and better capital. at the same time, new liquidity standards will ensure that banks have sound funding structures. these and other measures will make the global banking system more stable. however, there is always the other side of the coin : tougher rules for banks might lead to regulatory arbitrage where risky activities are shifted toward unregulated areas of the financial system. one current example is the growth of the shadow banking sector, where financial enterprises conduct business which creates bank - like risks but is either regulated insufficiently or not at all. bis central bankers ’ speeches the financial stability board estimates that the assets of non - bank financial intermediaries grew by us $ 5 trillion in 2012 and now stand at us $ 71 trillion. non - bank financial intermediaries represent about half of banking system assets and 117 % of global gdp. and china is no exception here. according to the imf, the size of the chinese shadow banking sector has more than tripled since 2008 and reached 35 % of gdp in march 2014. the imf estimates that china has the fifth largest shadow banking sector in dollar terms among those jurisdictions which are members of the financial stability board. a growing shadow banking sector is something regulators have to watch closely – not just in china but in other countries, too. shadow banking participants undertake maturity and liquidity transformation, they engage in the transfer of credit risk, and they operate with leverage. this means they carry out a range of bank - like functions which are associated with bank - like risks. at the same time, however, there are two key differences compared to the regular banking system. first, shadow banking participants and activities are not subject to banking regulation. second, shadow banking participants generally have no access to central bank liquidity, nor do they benefit from public backstops such as deposit insurance schemes. the consequence of this structure is a latent risk of runs on shadow banking participants. a run may lead to liquidity bottlenecks which can only be cleared by rapid deleveraging. that in turn may contribute to a collapse