axel weber : challenges to the global economy speech by mr axel a weber, president of the deutsche bundesbank, at the european banking congress, frankfurt, 18 november 2005. * * * ladies and gentlemen introduction it is a pleasure and an honour to offer you some thoughts on current challenges facing the global economy. the european banking congress is always an appropriate forum for discussing global matters. this is especially true this year as the motto “ eurasia – bull meets tiger ” addresses two of the most important players of the international monetary system. many economists tend to view globalisation as a basically benign phenomenon and take comfort in the fact that the global economy has been marked by robust growth and tame core inflation in the past few years. that is certainly true. but, on the other hand, we are witnessing several instances of possible imbalances : • commodity prices have reached new record highs, • yet government bond yields are low and corporate bond spreads and emerging market bond spreads are also low by historical standards, • in some economies, low interest rates are fuelling housing price booms, • additionally, the world economy is awash with liquidity, • last but not least, global current account imbalances are at unprecedented levels. with regard to that last point : the question of sustainability and the unwinding of the us current account deficit is crucial not only for the us economy itself, but also for the world economy. and it will have repercussions for asia as well as for europe. especially as both regions are on aggregate largely dependent on external demand. for example, exports from emerging asia have grown by more than 10 % per annum over the past decade. they now account for 45 % of emerging asia ’ s gdp. at the same time domestic demand has been subdued in most countries of the region. facts about global imbalances current account imbalances have widened considerably in recent years. the us deficit is at unprecedented levels. according to imf projections it will reach over 6 % ( as a percentage of gdp ) this year and next year. cec countries will also exhibit significant deficits of nearly 5 %. east asian countries on the other hand are characterised by notable surpluses. here current account adjustments in the wake of the asian crisis have not been reversed. but the regional disaggregation makes clear that it is predominantly the chinese external surplus which is driving the regional aggregate. asian economies, excluding china, will – according to imf projections – witness a significant shrink

##bitrarily but should instead reflect demographic trends and productivity gains. this brings me to the all - important question : how can an economy ’ s productivity be maximised? here, i would like to cite another economist who delivered some major input regarding growth theory : i refer to joseph schumpeter, who described the growth process as one of “ creative destruction ” under which an entrepreneur develops a new product or a cheaper method of production which then enables him to steal the market from his competitors. as a result, less productive businesses disappear from the market. overall, this serves to boost economic output. viewed from this perspective, the competitive forces unleashed by innovative enterprises are the engine of growth – and there is ample evidence to support this assessment. for example, as a rule, the prosperity - boosting effects of the european union have not arisen from higher trading volumes, as one might perhaps assume. rather, studies 1 show that the upturn in growth is mainly due to the fact that the expanded single market has intensified competition. and this increase in competition has in turn led to more innovative and therefore more productive enterprises. 3. common market for services this insight leads us directly on to several possible ways of increasing growth potential in germany and europe. the single market has proven extremely successful at simplifying trade in goods. as a result, competition here is intense. enterprises ’ market power does not enable them to charge large mark - ups on top of their costs ; levels are similar to those in the usa, for example. creating a transatlantic market – the ttip is a keyword here – could thus provide even more stimulus in this regard. the usa is the eu ’ s largest export market and its third most important import partner for trade in goods. as far as trade in services is concerned, the two regions share even closer connections. and it is precisely in the area of services that the eu still has some catching up to do in terms of intensifying competition. mark - ups on the cost of services are on average higher than in the usa. one could say that the european commission ’ s services directive has not lived up to expectations. creating a single market for services thus promises considerable economic benefits. the original intention behind the services directive was to anchor in law the “ home country principle ”, which already applies to trade in goods within the eu. this principle states that a service provider shall no longer be hindered by regulations in the importing country if it complies with national regulations