Europe and global imbalances: Not the problem, but part of the solution

Alan Ahearne and Jürgen von Hagen set out the major policy options facing Europe in the face of the alarming deterioration of the US trade and current account balances, in a Policy Brief just published by new European think tank Bruegel. The report, Global Current Account Imbalances: How to Manage the Risk for Europe (PDF), argues that although Europe may not be part of the problem, "it is boundd to be part of the solution":

The evolution of global current account imbalances, especially the huge and growing US current account deficit, has been the most alarming global economic development in recent years. So far, European policymakers seem to have watched the growing imbalances without much concern, in the hope that the EU will be largely unaffected by the inevitable correction of the US external deficit. This apparent complacency is unwarranted. Europe may not be part of the global current account problem, but it is bound to be part of the solution.

The US current account deficit must narrow eventually and this process will almost certainly involve a significant depreciation in the dollar. The more stubbornly Asian countries refuse to adjust their exchange rates and current account surpluses, the larger will be the appreciation of the euro and the resulting deterioration in the euro area’s current account balance. The sharper the adjustment and the larger the share of this adjustment that falls on Europe, the greater the risk of deflationary pressures and a severe recession in the euro area.

Comments

[Claus Vistesen]

The European role or lack thereof in the global imbalances as they are described in the text from Bruegel is interesting especially because European monetary policy probably can't solve the issues for Europe. So what to do? The text points to these four key issues ...

KEY CHOICES FOR EUROPE &
THE EURO AREA
In view of the inevitable adjustment,
European policymakers
face four key policy questions:
1 . What exchange rate policy in
Asia would be best for Europe?
2 . Should Europe welcome the
euro becoming an international
reserve currency?
3 . How can policy promote the
smooth reallocation of resources?
4 . What are the implications for
monetary and fiscal policy?

Especially points one and two are interesting; should Europe join the choir of American China-bashers claiming a devaluation of the yuan? The Euro as an international reserve currency? - it already is, right? At least to some extent

[Matt Canavan]

Europe are part of the 'problem'. (Although I don't think there is a problem at all.) The stagnant European economy has done nothing to soak up the savings glut from Asia, meaning more funds have flown to the more dynamic American economy. In any case, this is great for Americans because their interest rates are much lower.