6  BIS central bankers’ speeches  resulting in a surge in investment expenditure and a corresponding endogenous increase in inflation. But at a later stage, when the real effects of structural reforms show through, supply would catch up and inflation pressures would abate. For surplus countries this would, in my view, be a win-win outcome, thus setting the right domestic incentives to adjust. In some surplus countries the output gap is currently closing in the presence of low potential growth and a significant savings-investment imbalance. With the policy measures I have mentioned, they would instead be able to move towards a new, winwin equilibrium. An equilibrium that would not only be consistent with the external balance, but also tackle the interrelated domestic challenges of weak private and public investment and low potential growth. At the same time, this adjustment would be “self-limiting”, in the sense that upward pressure on inflation would be temporary and would not fundamentally undermine the country’s external competitiveness. How rebalancing plays out between surplus and deficit countries will determine the role of the euro area in global growth. As crisis-hit countries need to run continued surpluses to reduce their net liabilities, the euro area as whole will continue, unless the surpluses of other countries fall, to run a large surplus with the rest of the world. With weakening demand in emerging markets, this essentially puts the burden of generating global growth squarely on the shoulders of the United States.
We can only strengthen the euro area, to the benefit of all, if all member countries imagine themselves in comparable positions behind a veil of ignorance. This is why resetting all our economies onto a path of sustainable rebalancing is essential. Sustainable rebalancing is key to reducing risks. It is key to creating the preconditions for all euro area countries to stabilise, grow and converge. And it is key to laying the groundwork for Economic and Monetary Union to be completed. The euro area has been going through such a rebalancing process for several years now. So what I would like to do in my remarks is review where we stand today. How far has rebalancing come? Is that rebalancing sustainable? And, if not, what do we need to do to make it sustainable? These questions do not only matter for the euro area. They matter for the rest of the world as well, since rebalancing has important implications for global growth. If every economy were to react to their domestic challenges by exporting their slack, it would only trigger a race to the bottom. Therefore, only through achieving a truly sustainable rebalancing can the euro area start generating rather than absorbing global demand. Dimensions of sustainable rebalancing So what is sustainable rebalancing? There are four aspects we need to consider. The first is that external and internal rebalancing are twin concepts. For rebalancing to become truly sustainable, progress on both fronts is required.