run temporary current account deficits. the common feature in both these cases is that the current account serves to smooth consumption over time, and thereby raising welfare. thus, it has an inherent intertemporal dimension. as a result of the relationships i have just sketched, capital flows from countries with relatively large savings to countries with relatively high investment. in emu this flow of capital was increased by the introduction of the euro. there were two reasons for this. first, exchange rate risk was eliminated, making cross - border investments less risky. second, country default risks were increasingly perceived as converging towards a relatively low level. according to theory, the intra - emu capital flows should reverse once investments in deficit countries start to pay off. however, in reality, diverging current account positions might also reflect underlying distortions – this was the case in emu. 2. 2 … but proved problematic in emu the main problem for member states with current account deficits was that the inflow of capital was not always allocated efficiently. in spain and ireland it went into booming real estate markets, in greece it funded high government deficits and in portugal it supported private consumption. this allocation spurred internal demand and, owing to inflexible labour markets, wages increased more than productivity. this, in turn, reduced the competitiveness of the countries in question. as a consequence, imports increased, exports dwindled and the current account deficit grew further. although these imbalances have domestic roots, the associated problems are not confined to the national level. given spill - over effects in the closely integrated euro - area financial markets, they are also a problem for other member states and for the monetary union as a whole. the debt crisis in the first half of this year was a case in point. its external effects mean the problem of divergencies and imbalances in emu has to be solved. what are the policy options? 3. policy options a major dispute regarding policy options is the question of which group of countries has to adjust. in an asymmetrical approach only the deficit countries would act while a symmetrical approach would require economic policy in both deficit and surplus countries to adjust. as i just argued, the deeper causes of the imbalances are domestic factors within the deficit countries. hence, it is mainly incumbent on them to act. a number of structural reforms are necessary to enhance the competitiveness of domestic companies by increasing productivity and keeping costs in check. at the

joachim wuermeling : international cooperation in financial regulation - between myth and reality speech by prof joachim wuermeling, member of the executive board of the deutsche bundesbank, at a reception to welcome the new chief representative of deutsche bundesbank ’ s new york office gabriele kabelac and to bid farewell to dr claudia stirbock, new york city, 11 september 2018. * * * 1 introduction ladies and gentlemen, it is wonderful to be back in new york city, a city so rich in american and international flair. we are here today to welcome the bundesbank ’ s new chief representative, gabriele kabelac. for us at the bundesbank, this event is much more than a simple changeover – it symbolises the importance of our transatlantic partnership and friendship. but tonight is also the final night of rosh hashanah, the jewish new year. rosh hashanah, i learned, is also referred to as the day of remembrance. it requires an “ accounting of the soul ", a deep reflection on the past year. before coming here, i reflected not only on my personal year, but also on the political year behind us. i thought, for instance, about the still - looming trade war and its possible repercussions on economic growth throughout the world. but i also thought about the negotiations over finalising basel iii – which have been completed, thankfully, but were difficult, quite frankly – and the deregulation debate. it became clear to me that the values of international cooperation and multilateral alliances are being visibly threatened by growing political tensions within our nations as well as between them. i have reflected then on what would be necessary to enter into a healthier new year for our transatlantic friendship and for international cooperation. let me make a few remarks about what – in my opinion – won ’ t work and what can work. i will focus on banking and financial supervision, my main responsibility as a member of the bundesbank ’ s executive board. 2 the illusion of national sovereignty the first approach that won ’ t work is in my opinion the illusion of national sovereignty. this means the idea that – as the brexit cheerleaders led the british people to believe – if you pull your country out of the web of international agreements, you can go it alone and even be better off. unfortunately, reality has been demonstrating how much of a myth that is. regarding brexit, many people in the uk