stability and sustainability. this has exacerbated domestic and external imbalances and, ultimately, heightened risks to the global economy. some observers were aware that risks were rapidly building up and sent early signals. back in 2004 the ecb warned in particular about the “ uncertainties ” created by “ persistent external imbalances in some regions of the world and their potential repercussions on the sustainability of global economic growth ”. 3 repeated efforts to draw attention to the risks posed by global imbalances culminated with the launch in 2006 of multilateral consultations among systemic economies under the umbrella of the imf. for sure, there was no lack of analysis or discussion. but there was a lack of corrective action, and a lack of enforcement of the agreed corrective policy measures. what we are witnessing today is a disorderly unwinding of the past build - up of imbalances. not only are growth forecasts being revised downwards sharply, but so are current account projections. consider just one figure : the november international monetary fund projections suggest that the us current account deficit could come down to 3. 3 % of gdp by next year. this is almost a full percentage point less than the figure projected in april. importantly, this is nearly a halving from the peak deficit reached two years ago. but this adjustment is accompanied by several powerful factors : considerably heightened risk aversion ; significant real estate, financial asset and oil price corrections ; sharp reversals in the direction of capital flows and exchange rate movements ; mounting pressures on external financing for some emerging economies ; and, last but not least, a marked deterioration in global growth prospects. see e. g. michael p. dooley, david folkerts - landau and peter garber, “ the revised bretton woods system ”, international journal of finance and economics, 4 october 2004, vol. 9, pp. 307 - 313. see the editorial of the january 2004 ecb monthly bulletin. hence, while we are only now starting to fully understand the imbalances in domestic financial sectors, we have been aware of the external imbalances for some time. but little was done about it, the attitude being that it was somebody else ’ s problem. had we taken these symptoms more seriously, and had we taken appropriate preventive policy action, we might have been able to avoid or at least significantly lessen the adversity of the current crisis. the mutual reinforcement of domestic imbalances and external imbalance

lorenzo bini smaghi : the financial crisis and global imbalances – two sides of the same coin speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at the asia europe economic forum conference “ the global financial crisis : policy choices in asia and europe ”, beijing, 9 december 2008. * * * introduction 1 when analysing the current financial crisis the temptation might arise to attribute all the responsibilities to the excesses of the us financial system. i think this would be a mistake. while excessive debt creation and risk mispricing are clearly the root cause of the crisis, we should not forget that in order to make a market you need buyers and sellers. and this crisis is as much a crisis of sellers as of buyers. true, most of the toxic assets were originated in the major financial centres. but they were distributed not only in the us but also in other advanced economies as well as in emerging markets. market participants in these countries have often bought assets without fully understanding their risk profile. furthermore, there has been an insufficient production of alternative assets around the world, compared to the large amount of savings available. although global macroeconomic conditions might not be at the origin of the crisis, they have contributed to it. to help solve the crisis, we should not only overhaul the regulatory framework for financial markets but also ensure a better macroeconomic management of our economies. this should be one of the main focuses of the g20 agenda. i would like tonight to briefly elaborate on the close intertwining of the current crisis and global imbalances. i would like to consider how we can break the vicious circle and how we should respond to the crisis both in the short and the longer term. i will argue that we need a strong and appropriate policy response at global level. yet, in considering robust and consistent macro and micro policy measures, we should ask ourselves : what measures would have prevented the current problems? what measures could avert future problems? and what are the pre - conditions for these measures to succeed? importantly, we also need to start thinking hard about the longer run : how should the entire global monetary and financial system move forward? and what role should emerging market economies like china play? in my speech tonight, i would like therefore to address these two issues – the circularity and the policy response – in turn. 1. the global crisis the build - up of exceptionally large global imbalances in the last few