For instance, some recent figures for the euro area, and Germany in particular, as well as China seem to show that over time the contribution of the external sector may be decreasing. The ability of global trade to sustain growth and contribute to global recovery also seems to have been stronger than expected. The implications for global finance Let me now turn to the second issue, namely the implications of rising public indebtedness in advanced economies. Although deficits are expected to start narrowing gradually next year, the fiscal burden remains huge. Government debt levels among advanced economies are expected to increase further and approach 100% of GDP. The International Monetary Fund estimates that by 2015 the general government gross debt will reach 110% of GDP in the United States and 95% of GDP in the euro area. This amounts to an almost doubling in the United States and an increase of around 40% in the euro area. Looking forward, the issue of the sustainability of the debt in several industrial countries is looming. This raises several analytical problems, which in my view have not been fully examined in the literature, but which are very important for policy-makers and financial market participants. Here I will consider two of them. The first analytical problem relates to the assessment of a country’s solvency. This task is not as simple as assessing the solvency of a company, a household or a financial institution.
Higher solvency risk also increases other risks at the macro level, such as the risk of “financial repression”. 5 As public debt rises to unsustainable levels, domestic financial institutions may be “encouraged”, if not forced, to hold domestic sovereign debt in their portfolios. This would lead to inefficient allocation of capital, high costs of financial intermediation and thus lower growth. 6 Finally, in the case of reserve currencies, higher solvency risk would potentially hamper the stability of the international financial system. These questions are just a few examples of the issues on which we need further work. To conclude, it is clear that current and increasing levels of public debt in advanced economies raise problems which are not only of a macroeconomic nature, but affect many other dimensions of the global economy. On the other hand, our ability to understand the complexity of the issue is still limited. This situation is worrying, to the extent that our societies may take decisions on the basis of imperfect models and wrong assumptions. Not everybody agrees with the concerns I have just raised, and many take the current very low yields on some government bonds as a comforting sign. My impression is that they may be confusing relative and absolute concepts of risk. And such a mistake could entail very high costs for our societies. Thank you for your attention. 2  Reinhart, C. and K. Rogoff, 2010, “From Financial Crash to Debt Crisis”, NBER Working Paper 15795.