François Villeroy de Galhau: External imbalances - challenges and policy responses Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the "Financial Globalisation" conference, Central Bank of Ireland Symposium, Dublin, 2 February 2018. * * * Accompanying slides Speech elaborated with the contributions of Antoine Berthou, Matthieu Bussière, Laurent Ferrara, Sophie Haincourt, Francesco Pappadà and Julia Schmidt Ladies and Gentlemen, First and foremost, I would like to congratulate the Central Bank of Ireland on the 75th anniversary of its creation, and especially my colleague and friend Governor Philip Lane. I am delighted to be part of this conference dedicated to “Financial Globalisation”, with such distinguished speakers and panellists. I would like to share with you a few thoughts on global current account imbalances and in doing so I will take mostly a policy perspective. The stylised facts are well known so I will be brief [Slide2]. Starting from the late 1990s, the world economy was characterised by very substantial growth in global current account imbalances. Despite a process of rebalancing and short-term movements mainly related to commodity prices that started with the Great Recession in 2008– 09, these imbalances have remained large and persistent. Consequently, net international positions have continued to increase [Slide 3]. The euro area is one of the regions where developments have been particularly striking [Slide 4]. Although countries such as Spain or Italy have rebalanced their current accounts, imbalances still persist, mostly due to the large surpluses of Germany and the Netherlands.
Large current account imbalances, in particular deficits, pose significant risks for external debt sustainability and raise the possibility of sudden stops.6 Gross positions are now 3 to 4 times larger than their 1995 level, ranging from 150–300% of GDP (150% in the case of the US and 300% in the case of France, for example). Net positions are considerably smaller [Slide 8, table on right-hand side], but have widened by a factor of 5 to 10 with respect to their level in 1995. The counterpart of persistently large current account imbalances is large net external asset positions [as already shown in Slide 3], but also continued accumulation of external assets and liabilities. In this respect, the composition of the financial account (FDI, equity and debt portfolio flows as well as the other investment category, which largely comprises banking flows) matters. Examining the different financial instruments, one notices that the volatility in overall flows is largely driven by banking flows [Slide 9]. Given the large pre-crisis expansion in cross-border banking flows, especially within the euro area, the “low” level observed in recent years could 2/5  BIS central bankers' speeches  simply be interpreted as a return to normal. Indeed, in the aftermath of the Great Financial Crisis, banking flows retrenched the most, followed by debt portfolio flows.7 Portfolio equity flows have been much more resilient than debt flows, which have halved between the pre- and the postcrisis periods.