10.09.2019  Global Imbalances and Capital Flows in the Era of New Technologies Opening Remarks - Banco de España and the Reinventing Bretton Woods Committee Pablo Hernández de Cos Governor  Ladies and gentlemen, I am delighted to welcome you to this conference on global imbalances and capital flows in the era of new technologies. The Banco de España is particularly honoured to be co-organising it in collaboration with the Reinventing Bretton Woods Committee on the 75th anniversary of the Bretton Woods agreements. Indeed, an anniversary to celebrate, and a unique opportunity to praise the merits and achievements of the rules-based system set by these agreements. But it is also high time to reflect on the challenges facing our current framework of global economic governance inspired by the agreements. The core values of multilateralism and international cooperation that guided the Bretton Woods agreements in the past, are at least as necessary today as, with hindsight, they were 75 years ago. Admittedly, the world has changed rapidly and profoundly. In such an evolving context, some “tailoring” to update international economic governance may be warranted, precisely to ensure that the core values that have promoted international cooperation will continue to do so in the future. In particular, over the last few decades we have been witnessing the emergence of new economic, political and geostrategic powers, as well as new challenges: population aging, migrations, security threats, social inclusion, and climate change, to name just a few.
The majority of countries with relatively strong GDP growth rates prior to the crisis also experienced a relatively strong downward adjustment, in some cases undoing much of the welfare gains that were achieved since the launch of the euro. Some might see this as evidence that the assumptions of the neoclassical growth model need to be qualified – that absent credit-driven growth, there is no reason to believe that euro area economies should converge towards similar levels of productivity, or even rates of productivity growth.12 Indeed, endogenous growth models allow for persistent divergences as some forms of capital exhibit non-diminishing returns. Yet, I think it is too early to draw such a conclusion. The neo-classical assumptions have not yet been properly tested, simply because capital did not flow where the marginal return would have been highest. What the euro area needs, in my view, is to “re-run” the convergence process, but with the appropriate conditions in place to ensure efficient allocation of resources, and the right framework to make convergence sustainable. Let me explain in more detail what that might entail. To begin with, catching-up economies have to address the immediate after-effects of the previous misallocation of capital. The pre-crisis inflows into the non-tradable/services sector were associated with real exchange rate appreciation, rising unit labour costs (ULC) and increasing dependence on external financing. When the financial cycle turned, however, capital flows quickly reversed.