donald l kohn : global imbalances speech by mr donald l kohn, vice - chairman of the board of governors of the federal reserve system, at the high - level conference on the international monetary system, zurich, 11 may 2010. * * * as the global economy continues to heal from the devastation wrought by the financial crisis, we must not lose sight of our collective responsibility to ensure that the conditions that gave rise to the crisis are not repeated. on this score, many efforts are under way to promote a more resilient global financial system, but clearly much more remains to be done. in my remarks today, i will focus on global current account ( or, external ) imbalances, their role in contributing to vulnerabilities in the global economy, and polices that should be undertaken to ensure that the ongoing recovery is built on a solid and durable foundation. 1 if we are to avoid repeating our mistakes, we must learn the right lessons from experience. sorting through the many complex factors that led to the global financial crisis is no easy task. although i will argue that global imbalances did contribute to the crisis, it is important to acknowledge that some countries run current account deficits for sound economic reasons while others run current account surpluses. to the extent that global imbalances reflect the efficient allocation of capital and distribution of risk across countries, they support a wellfunctioning global economy. thus, our policy actions and reactions should not seek to reduce imbalances for their own sake. rather, our aim should be to address the imbalances that emerge from or contribute to economic distortions or the mispricing of risks, which thereby foster vulnerabilities in the international financial system and threaten sudden and disruptive reversals. large and growing global imbalances were a perennial topic in meetings of international policymakers for years prior to the crisis because they were seen as threat to the global economy. from 1996 to 2006, the u. s. current account deficit widened dramatically, from about 1 – 1 / 2 percent of gross domestic product ( gdp ) to 6 percent. this widening primarily reflected a fall in domestic saving, as domestic expenditures became increasingly reliant on borrowing from abroad. 2 the counterpart to the rising u. s. deficit was a surge in the current account surpluses of other countries. in some asian emerging market economies, current account surpluses arose as domestic investment collapsed after the financial crisis of the late 1990s, and domestic demand

by around 0. 8 percentage points. this contributed to the slower recovery and weaker price pressures we experienced. many observers, myself included, were already highlighting this inconsistency before the pandemic. 2 but the crisis, by its very nature, forced us to take a much - needed change of direction. fiscal policies had to step in to offset lost private sector income, because monetary policy could not target the sectors most in need of help. and we have now seen how powerful this can be : in the fourth quarter of last year, compensation of employees in the euro area fell by more than 2 %, but real household income actually rose by 0. 6 % thanks to powerful government transfers. in parallel, monetary policy has continued to deliver the financing conditions necessary for all sectors of the economy to respond to the crisis, making a superior policy mix possible. strong policy support will continue to provide a bridge over the pandemic and well into the economic recovery. the ecb is committed to preserving favourable financing conditions throughout this period. on the fiscal front, the european commission expects the euro area fiscal stance to loosen by 2. 5 percentage points of gdp this year. 3 better policy alignment has also extended to supply - side policies. with hindsight, one of the lessons of the last decade is that structural reforms should not focus exclusively on increasing “ competitiveness ” – defined as lowering costs and boosting exports. they should also focus on raising productivity and modernising our economies. but what is unique about ngeu is that it combines funding for investment with future - oriented structural reforms focused on making our economies greener and more digital. this combination is critical to ensure that the crisis does not leave lasting scars. the number of people who will need to find a different job by 2030 has risen by 25 % in advanced economies due to the pandemic. 4 we know that strong recoveries are key for people to move into new jobs quickly5 and the focus of ngeu on productive investment should provide a sustained boost to growth. green spending is estimated to have a multiplier two to seven times higher than non - green projects. 6 at the same time, targeted structural reforms should help ensure that freed - up resources are redirected to green and digital activities, and that demand flows towards the jobs and sectors of the future. the 22 recovery and resilience plans that have been presented to the commission so far look encouraging. all of the largest economies are planning to dedicate at least