the increase in surplus essentially reflects a fall in investment as opposed to a rise in savings as is the case for china and the oil - exporting economies. in the thai case, a deep currency depreciation after the crisis led to a shift in profitability towards tradeables, and induced a major shift in resource allocation. also, the damage to the banking sector compromised credit growth and the subsequent expansion of domestic demand, as the ability of the financial sector to take risk became more constrained. as a result, there was a sharp fall in domestic demand, especially private investment. and exports, by default, became the key engine for growth. similar adjustment was observed throughout east asia. the adjustment led to a turnaround in the external current account, a decline in external indebtedness, and a rise in international reserves, all of which helped strengthen the region ’ s external position. given the weakness in domestic demand, limiting large currency appreciation becomes a necessity for some economies to support economic recovery. and with weak domestic demand, pursuance of banking reform was an important policy to normalize lending and credit growth. on top of this, liberalization to allow more capital outflows also became an instrument of choice in managing the macroeconomic impact of rapid capital inflows. on the demand side of global capital, policy configuration in the us was instrumental in allowing the external surplus of emerging markets to be absorbed through the us current account deficits. the key mechanism, as i noted, has been the easing of us monetary policy that has helped support global growth through the expansion of us demand. with private investment in the us still recovering from the stock - market correction in early 2000 $ s, lower interest rate and greater access to credit significantly increased us consumption at the expense of a fall in private savings. as a result, the us external imbalance widened while reserves accumulation by emerging markets increased. the next question is can this go on? and is reserves accumulation a temporary or a permanent feature of the international monetary system? to answer this question, one has to distinguish between stock and flows. on the flows side, given reserves accumulation essentially mirrors external surpluses of emerging markets, the pace of reserves increase going forward is more likely to ease. this is because the adjustment process that is now ongoing will reduce the imbalance. the more the adjustment, the less will be the additional flows, and hence the pace of reserves accumulation. but to be successful, the adjustment will require both expenditure reduction, through

they see stricter trade and immigration controls as the answer to people ’ s concerns. however, they fail to recognise that it is precisely the opening - up of trade that improves a country ’ s competitiveness by facilitating the division of labour, which enables countries to exploit their own individual competitive advantages. this allows goods to be produced at low cost, which increases consumers ’ purchasing power. ideally, this stimulates demand ; prosperity, investment, and, ultimately, employment increase as a result. one thing is clear : isolationism brings no benefits, offers no stability and does not lead to prosperity. the belief that protectionism is the better alternative is merely an illusion. 1 / 4 bis central bankers'speeches nonetheless, scepticism regarding the european project has grown. of course, some of the criticism aimed at the euro area is justified. unfortunately, closer european cooperation also produces undesirable side - effects. without a doubt, there are major benefits to the single european market. but, at the same time, it obviously creates redistribution effects which can cause the regional loss of jobs or wage stagnation. and these effects tend to undermine many people ’ s trust in the european union. the european project must therefore be judged on the extent to which it benefits all its citizens. on the one hand, economic and socio - political action needs to be taken in this regard – but i won ’ t go into further detail about that today. on the other, however, there is also a fundamental need to overhaul the regulatory framework in europe. parts of this framework need to be adjusted and parts need to be completed in order to provide a stable footing for the european project in the long term. only stable institutions and a reliable regulatory framework can create confidence. we saw the opposite of this during the european sovereign debt crisis, when a lack of confidence in the euro area led to a crisis which was by no means confined to individual countries. even though many necessary reforms have been initiated and the euro area has been made significantly less vulnerable to crises, we have not yet reached our goal. we still need to press ahead with the right reforms in order to strengthen people ’ s trust in the institutions of the eu, which would also take some of the wind out of the sails of populism. so let ’ s now consider where we could start making specific institutional changes. 3. the euro area – room for improvement in the status quo the sovereign debt crisis made one of the euro area ’ s problems glaring