This means that all parties have to step up their efforts to resolve imbalances. And numerous studies – including our own work at the Bundesbank – show that adjustment via different channels in isolation (growth differentials, exchange rates, US fiscal consolidation) would clearly not be of much help – unless the movements in the relevant variables attain either unrealistic or damagingly high magnitudes.
Two questions then remain: 1) How can adjustment be smoothed? 2) How can resistance to an (abrupt) adjustment be increased? The most sensible answer to these questions are, in my view, to be found in the well-known approach agreed at several IMF and G7 meetings: (a) US: increase in domestic savings, (b) Asia: more flexible exchange rate policies, (c) Europe: structural reforms.