sector that hampers domestic lending – and channels domestic savings abroad. of course, in some commodity exporting countries, surpluses and official sector savings have been boosted by elevated commodity prices. i would also like to emphasize the significance of the domestic policy contexts in the major deficit and surplus countries. as i mentioned in the beginning, the solution to the issue of external imbalances seems relatively simple if considered in isolation : just reverse the existing divergent trends in saving and investment ratios between the countries involved. it is important, however, to recognize that the global imbalances also reflect cross - country differences in economic structures and real resources, which give rise to differing policy interests. the post - crisis outlook for the imbalances so what does the crisis imply for the evolution of the imbalances going forward? here i wish to make a few brief observations. on the one hand, the challenge of external rebalancing in the deficit countries has become closely intertwined with the internal rebalancing between public and private demand. whereas the low saving rates in major deficit economies previously reflected large - scale private sector borrowing, the rapid decline in private spending after the crisis replaced private deficits with sizeable public sector deficits. too much of global demand and economic activity is now dependent on the fiscal deficits in the developed world. therefore, the deficit countries here face a dual task : to rebalance the government budgets and, at the same time, to establish a growth - friendly economic environment that provides a sustainable foundation for the growth of private spending. in terms of policy, one priority here lies in measures to maintain the availability of credit to the private sector, for example through repair and reform of the financial sector. however, credit is not enough by itself. the growth of private demand must lie on a sustainable basis. in the deficit countries, future growth inevitably needs to rely increasingly more on net exports. this is a competitiveness question, but also a structural question. and this, of course, goes part and parcel with the objective of reducing the external imbalances. on the other hand, recent events clearly demonstrate how the current crisis has increased the international pressure on emerging market countries with surpluses. this was clearly apparent at the last round of g20 discussions, where foreign exchange issues were at the centre of the agenda. undoubtedly, the problem has not gone away and will be one of the hardest issues also in the upcoming meetings. however the exchange rate, the real exchange rate to be

erkki liikanen : global rebalancing, asset prices and policy responses speech by mr erkki liikanen, governor of the bank of finland, at the fifth high - level seminar of the eurosystem and latin american central banks, madrid, 10 december 2010. * * * due to the strike and weather conditions the speech was distributed in written form. some background global imbalances are certainly not a new policy concern. the most visible manifestation of these imbalances is the large current account deficits and surpluses, but these are not the whole story. current account positions reflect a number of deeper, more fundamental problems. therefore, the inevitable future rebalancing has to involve deeper structural changes in the countries involved. the risks caused by the global imbalances have been well documented in research and policy papers over the last ten years. also, the imbalances have long been among the central agenda items in several international meetings. most recent serious efforts to address them include the imf - led multilateral consultations in 2006 and, today, the ongoing g20 mutual assessment process. such rounds of discussions have successfully established a broad agreement over the key policy objectives to resolve the problem. at their simplest, these are remarkably straightforward. national saving needs to increase in the major deficit countries ( such as the united states ), and be reduced in the major surplus countries ( such as emerging asia and the oil exporting countries ). it has also been acknowledged that for both deficit and surplus countries, meeting these objectives requires significant policy adjustments. however, the multilateral initiatives to address global imbalances have so far suffered from an obvious lack of traction to actual policy outcomes. since the onset of the global financial crisis, the imbalances have admittedly undergone a certain reduction. but recent projections indicate that the imbalances tend to persist – or even grow – well into the future. it appears that the imbalances have become an even more persistent characteristic of our economic environment than was previously thought. the nature of the imbalances international surpluses and deficits are not, of course, harmful as such if they remain reasonable. they are a natural reflection of financial integration. they provide flexibility to savers and investors. by that, they are welfare enhancing. however, very large current account deficits, when persistent and growing, fuel concerns of external sustainability. two main risks to the international community have been extensively debated for almost a decade. first, sustainability concerns may