Transcript What future for the international role of the euro?

Isabel Vansteenkiste
Some reflections on: global
imbalances – do net
capital flows still
matter?*
DNB workshop, Amsterdam
18 March 2013
* The views expressed in this presentation do not necessarily
reflect the views of the ECB and the Eurosystem.
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Introduction
 The growing importance of international asset trade
 The implications of the growing role of international asset trade
 Does the current account still matter?
 Implications for the policy debate
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The growing importance of international asset trade
relative to trade in goods and services
US gross financial flows
(% of GDP)
US current account component flows
(% of GDP)
30
30
assets
import
net transfers
liabilities
export
income paid
20
20
10
10
0
0
-10
-10
-20
-20
-30
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
-30
1970 1974 1978 1983 1987 1991 1996 2000 2004 2009
Source: Lane and Milesi Ferretti
Source: OECD
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The growing importance of international asset trade
relative to trade in goods and services
IE gross financial flows
(% of GDP)
IE current account component flows
(% of GDP)
250
400
assets
liabilities
import
net transfers
export
income paid
300
200
200
150
100
100
0
50
-100
0
-200
-50
-300
-100
-400
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
-150
1990 1992 1994 1997 1999 2001 2004 2006 2008 2011
Source: Lane and Milesi Ferretti
Source: OECD
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The consequences of the growing role
international asset trade
Current account balances no longer matter under two opposite views of the
world
 Under complete Arrow-Debreu asset markets, countries pool their risks. At the
extreme, idiosyncratic income movements are offset completely by net
insurance payments from abroad
 Imperfections in risk sharing can reinforce each other so as to magnify
systematic risks
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A case in point: the role of the euro area in global
imbalances
Global imbalances (% of world GDP)
2.50
UK
Oil exporters
China
Japan
Euro area
United States
2.00
1.50
1.00
0.50
0.00
-0.50
-1.00
-1.50
-2.00
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: IMF WEO, ECB calculations
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However, the euro area developments also show
the importance of current account balances
Euro area current account imbalances (% of GDP)
15
Germany
Spain
Greece
Portugal
Euro area
10
5
0
-5
-10
-15
-20
97
98
Source: IMF WEO
99
00
01
02
03
04
05
06
07
08
09
10
11
12
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While in emerging market economies gross financial
flows remain less important
Korea gross financial flows
(% of GDP)
Korea current account component
flows (% of GDP)
80
80
assets
liabilities
import
net tansfers
export
income paid
60
60
40
40
20
20
0
0
-20
-20
-40
-40
-60
-60
-80
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
-80
1980 1983 1986 1990 1993 1996 2000 2003 2006 2010
Source: Lane and Milesi Ferretti
Source: OECD
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Implications for the policy debate?
Current framework:
 G20 Pittsburgh Leaders agreement
 Pre-crisis composition of global growth was unsustainable and global demand
patterns should be rebalanced: Large deficit economies should increase
domestic savings; Large surplus economies should increase consumption
 Strengthening the International Financial Regulatory System
 Basel III, OTC derivatives markets, shadow banking, accounting convergence,…
 Move towards a more resilient international monetary system
 Coherent conclusions to guide us in the management of capital flows, common
principles for cooperation between the IMF and RFAs, and an action plan for
local currency bond markets
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Looking ahead: global imbalances remain large
External imbalances (% of GDP)
4
Start of the global financial crisis
3
2
1
0
1981
1985
1989
1993
Source: IMF WEO, ECB Staff Calculations
1997
2001
2005
2009
2013
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And rebalancing appears to be mostly cyclical
Estimates of the cyclical components in the change between 2007 and 2012 for
selected G20 economies’ current account positions (in %):
Australia
51
China
63
Brazil
74
Indonesia
55
Canada
42
United States
73
Sources: ECB staff calculations based on IMF data
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Looking ahead: what should the G20 focus on?
 Importance to maintain the G20 commitments and maintain
the momentum
 But:
 Need to focus more international linkages (real and financial)
 Move towards a more resilient international monetary system is a
continuous process
 Need for a more integrated approach
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Thank you for your attention
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Background
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And rebalancing appears to be mostly cyclical
China
United States
5%
Actual
Benchmark
Cyclical component of CA gap*
12%
Actual
Benchmark
Cyclical component of CA gap*
10%
3%
8%
1%
6%
-1%
4%
2%
-3%
0%
-5%
-2%
-7%
-4%
1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e)
1999 2001 2003 2005 2007 2009 2011 2013(e)2015(e)
Sources: ECB staff calculations based on a Bayesian framework and on 16,000 models spanning all possible combinations of macroeconomic
fundamentals for each country (see Bussière et al. 2010).and IMF WEO data (April 2010).
Note: (*) The cyclical component is defined as the residual of the subtraction between actual current account and its estimated equilibrium, cleaned from
a time-varying trend calculated from a Hodrick-Prescott filter (which aims to purge these residuals from factors that are not captured by the model).
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Importance of oil
External imbalances (% of GDP; with and without oil trade balance
6
CA
CA without oil
5
4
3
2
1
0
80
82
84
86
88
Source: IMF WEO, ECB Staff Calculations
90
92
94
96
98
00
02
04
06
08
10
12