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

to achieving domestic price stability in a sensible manner and seeking to communicate our policy intentions as clearly as possible. let me finish with a few words on the exit from unconventional monetary policies. while it may still be a way off, we know it will come eventually. and the recent market volatility prompted by heightened expectations of imminent tapering in the rate of asset purchases by the federal reserve has provided a salient reminder that it may not be smooth. moreover, although the adoption of accommodative policies was synchronised across the advanced economies, the heterogeneous nature of the recovery, with the united states leading the way and europe bringing up the rear, means that exit is unlikely to be synchronised, which will complicate matters. the international spillovers mentioned earlier can obviously be expected to operate in reverse on exit. and indeed, we have just seen such synchronised increases in long - term sovereign bond yields internationally, together with capital outflows from emerging economies and associated downward pressure on their currencies. but for these countries, the greatest danger during exit will probably lie in the risk of future financial sector disruption if outflows expose currency mismatches on bank and corporate balance sheets. for advanced economies, particularly those lagging behind on the road to exit, there is a risk that market participants see tightening moves in, say, the united states as indicating that tightening is imminent elsewhere. although synchronised movements in bond rates is unsurprising given the high degree of substitutability between relatively safe sovereign bonds, synchronisation at the short end of the yield curve is not warranted if cyclical positions differ. such concerns prompted the monetary policy committee of the bank of england and the governing council of the european central bank to push back against the recent upward movements in the short end of the yield curve in our respective policy statements in july. the mpc took this further at our latest meeting by offering explicit forward guidance on the future path of policy rates and asset purchases. the guidance is similar to that already adopted by the federal open market committee, but differing in details that reflect the different position of the uk economy. in particular, we signalled our intention not to countenance tightening policy until unemployment has fallen to at least 7 %. in addition, while our guidance is subject to two price stability overrides similar to those of the fed relating to internal and external bis central bankers ’ speeches measures of