states and japan. by contrast, that share has since declined to about 13 %. the crisis not only exposed the imbalances existing within the euro area but also revealed the incomplete character of economic and monetary union ( emu ). the governance bis central bankers ’ speeches framework underpinning emu proved insufficient to create adequate incentives to address macroeconomic imbalances, foster sound public finances and prevent the propagation of shocks to the european financial system. in order to secure long - term stability in the euro area and ensure a durable rebalancing, some of the initial design flaws in the euro area ’ s governance structure need to be fixed permanently. this requires a concerted effort from governments to complete emu. in this regard, the “ four presidents ” ( of the european council, the european commission, the eurogroup and the ecb ) have identified four pillars on which to build a genuine emu and so a more stable and prosperous europe. these pillars are : a banking union with a single supervisor ; a fiscal union that can effectively prevent and correct unsustainable budgets ; an economic union that can guarantee sufficient competitiveness to sustain high employment ; and a political union that can deeply engage euro area citizens. progress is being made on all four pillars to build a genuine emu. however, the road towards a complete emu is still long. a firm commitment from governments is the best insurance that we are building the bridge to a more stable and prosperous euro area, one in which the rebalancing we observe today will be here to stay. there is evidence that rebalancing has also started in china. the current account surplus has narrowed markedly, from 10 % of gdp in 2007 to less than 3 % of gdp in 2011 ; foreign exchange reserve accumulation has slowed down significantly, with reserve holdings remaining roughly stable in the course of 2012 ; and, finally, there seem to be signs that the economy is gradually shifting from external sources of demand to domestic sources. a key question is how much of this rebalancing is due to cyclical factors, in particular slower growth in advanced economies. there have been concerns that china ’ s growth model remains overly reliant on investment at the expense of consumption, and that house price valuations are stretched. so in china, too, a permanent rebalancing hinges on the continuation of structural reforms, including : the continued expansion of social safety nets ; the reform of the banking sector ; the gradual liberalisation of the

peter praet : the “ great rebalancing ” of the euro area and the global economy keynote speech by mr peter praet, member of the executive board of the european central bank, at the hamburg summit “ china meets europe ”, hamburg, 30 november 2012. * * * i wish to thank maurizio michael habib and arnaud mehl for their contributions to this speech. many thanks for your kind invitation to speak at this summit on the future of china and europe in the global economy. the pre - crisis period is sometimes referred to as the “ great moderation ”, 1 and the onset of the crisis in 2007 and 2008 as the “ great recession ”. 2 today i ’ d like to provide an additional perspective and suggest that we may now be experiencing a “ great rebalancing ”. the period before the crisis was marked by the global build - up of large external and domestic imbalances. the united states had large current account deficits and china large surpluses, while there were serious macroeconomic imbalances across the euro area. however, the eruption of the global crisis about five years ago marked the start of a major rebalancing. demand patterns – both at the global level and within the euro area – have been undergoing a significant rebalancing process, which has admittedly been painful in some ways, but necessary from an overall perspective. a key question now is whether this process is cyclical or structural. today i will argue that part of the “ great rebalancing ” is structural, which is welcome. but another part is cyclical, meaning that it might fade out as soon as global economic growth turns a corner. so it ’ s a concern that if countries are not sufficiently committed to carrying out the necessary reforms, unsustainable imbalances might re - emerge which would then put the global recovery at risk. let me now focus, in turn, on signs of a “ great rebalancing ” in the united states, the euro area, and china, as well as on the role of macroeconomic policies in this process. let me start with the united states. before the collapse of lehman brothers in 2008, the large external deficits of the united states were a major source of concern. the us current account deficit reached 6 % of gdp in 2006, its highest level since 1945. such deficits reflected a wide array of factors, including a housing bubble, increasingly leveraged households