, from an economic perspective it expresses an important budget constraint : deficits need to be financed. furthermore, the current crisis has shown that national imbalances can create significant contagion effects in a monetary union. in this regard, financial integration has proved a double - edged sword : while it deepened funding reservoirs in good times, the increased interconnectedness also served to propagate shocks far more strongly than before, creating new vulnerabilities. in the end, to prevent financial stability risks in the euro area from materialising, public funds were used to substitute the drained private funds to finance the deficits : first, through intergovernmental loans or through the european rescue funds, that is the efsf and the esm ; and second, through refinancing operations of the eurosystem with banks in the peripheral countries ; a point to which i will return later. it is a well - known fact that in a fixed exchange rate regime, the national central bank can, at least in the short term, choose between directly intervening by selling foreign currency and raising its key interest rate in order to uphold the exchange rate. this is precisely what we have seen recently in some emerging market countries. both of these measures produce a squeeze in the domestic money supply and therefore in credit demand, which ultimately reduces the demand for goods and services in the real economy. in the long run, sustainability is restored through the imposed reduction of relative prices and wages. in contrast to balance of payments crises under fixed exchange rate regimes, the adjustment process in the euro area is cushioned and protracted by the single monetary policy through harmonised short - term interest rates and liquidity assistance measures of the eurosystem. this means that the national stock of money in circulation in an individual deficit country is not generally reduced to the same extent as private net capital outflows. instead, commercial banks can cover their existing financing needs via greater refinancing from the central bank – bis central bankers ’ speeches at least if they have sufficient collateral and if the central bank has no limit in place for the stock of refinancing credit. this is precisely the fixed - rate full allotment policy the eurosystem introduced in 2008 to safeguard the liquidity of the euro - area banking system after the common european money market had encountered severe strains. as a result, there is no monetary policy pressure to adjust prices and wages. indeed, empirical studies carried out by the bundesbank staff have confirmed

jens weidmann : external imbalances in the euro area speech by dr jens weidmann, president of the deutsche bundesbank, at the international business cycle conference, kiel institute for the world economy, kiel, 17 march 2014. * * * introduction ladies and gentlemen the international business cycle conference has become a firm fixture within an institution that is itself very much a fixture of the german economics landscape. truly international in its focus from the start, the kiel institute for the world economy has nevertheless shaped the national economic discourse like few other institutions have done. over the last hundred years, its global perspective, research quality and policy relevance have made it one of germany ’ s leading economic research institutes. and to me, this sounds like a formula for success in the 21st century as well. i am therefore grateful for the invitation and for the opportunity to speak here today. analysing international developments and germany ’ s role in them is the kiel institute ’ s core competence. but as the english writer charles caleb colton once pointed out, imitation is the sincerest form of flattery. so let me celebrate the kiel institute ’ s centenary by having a go at analysing international developments, and germany ’ s role in them, myself. in the next 25 minutes or so, i wish to present my take on the external imbalances in the euro area and germany ’ s role in this context. in particular, i will be focussing on three points : • that compared to a fixed exchange rate regime, the adjustment pressure of a deficit country in a currency area is cushioned by the single monetary policy, avoiding excessive adjustment costs, but which also calls for additional rules ; • that stimulating german demand cannot be a substitute for removing rigidities in the deficit countries, but that strengthening germany ’ s growth potential, for instance by increasing competition in the services sector, will be helpful with regard to the current account as well ; • that due to its demographics and degree of economic development, germany ’ s role as a capital exporter is unlikely to change, which means that, to a certain extent, german surpluses are here to stay. let me start by taking a closer look at the role of external imbalances in a monetary union. macroeconomic imbalances in a monetary union in the early stages of european economic and monetary union, interest rates in the member states converged at a low level following the elimination of exchange rate risk. from the perspective of deeper economic and financial market integration,