In the June 11, 2013 issue of my newsletter I discussed a presentation by three economists from the EU, one based in Beijing and two visiting from Brussels, who had asked a few weeks earlier if they could come to my central bank seminar at Peking University and speak about the euro crisis.
…Needless to say the presentation was fascinating. There was one point, however, that drew a great deal of shocked comment from my students. The visitors presented a graph projecting Europe’s balance of payments out to 2014 as a way of illustrating how Europe would resolve domestic demand imbalances.
…I reproduced the graph in my June 11, 2013 newsletter and titled it “the scariest graph in the world”.
Two weeks ago a couple of economists from the EU spoke at my central bank seminar, and among other things they presented us with what I would call the scariest graph in the world. The graph makes it pretty clear that the surge in European surpluses, which was largely matched before the crisis by the surge in deficits in peripheral Europe, is expected to be maintained even as surpluses in China and Japan, the other leading surplus nations, have dropped dramatically, but since these northern European surpluses can no longer be counterbalanced by deficits within peripheral Europe given how indebted and troubled are their European trade partners, the hope is simply to force them abroad.
In a world with weak demand and deteriorating trade relationships, in other words, the northern Europeans have decided that rather than boost domestic demand they will resolve their domestic problems by absorbing far more than their share of global demand, to the tune of 2-3% of Europe’s GDP. Here is the graph:
This is absurd. If they succeed it will only be temporarily and at the expense of their already-suffering trade partners, and as a consequence it will just be a question of time before global trade relationships get even nastier than they have been. Of course if trade relationships deteriorate enough, and so force the imbalances back onto Europe, the result will be a surge in German unemployment with no corresponding relief in unemployment in the periphery.
Away from Europe the US continues slowly to adjust but I worry that this adjustment will be derailed by a weaker external sector. Meanwhile Japan is still struggling with its debt burden and seems to have no real way of resolving it except by forcing down the currency and interest rates, both of which mean that household sector is expected to reduce consumption to support the debt burden without, it seems, any corresponding increase in investment. In China the good news is that the rebalancing process seems to have become more determined than ever before in the past, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China’s adjustment.
Last week Deutsche Bank strategist George Saravelos published a note that caused a frisson of fear throughout the markets, and for exactly the same reasons that my seminar students had pounced on the “scariest graph in the world”. Speaking of what he called a $400 billion “euroglut” of excess European savings over already-paltry European investment, Saravelos wrote:
The clearest evidence of Euroglut is Europe’s high unemployment rate combined with a record current account surplus. Both are a reflection of the same problem: an excess of savings over investment opportunities. Euroglut is special for one and only reason: it is very, very big. At around $400 billion each year, Europe’s current account surplus is bigger than China’s in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters.
It certainly does matter, and is more evidence, if any were needed, about how global imbalances were not just the source of the 2007-08 crisis but, unless the world moves quickly to limit their impact, will continue destabilizing the world economy for many more years.
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