Beware the global imbalances!

One of the "culprits" of the recent financial crisis has been the global imbalances between the surplus and deficit countries. Most notably it was seen by the enormous US deficits and China's massive trade surplus. The European Central Bank (ECB) recently issued a warning that not much has changed and that global economic recovery is under threat. The Financial Times reported:

The ECB has made clear its fear that governments are not doing enough to put the global economy back on a sustainable growth path – despite international policy initiatives in the past year. “At the current juncture, global imbalances continue to pose a key risk to global macroeconomic and financial stability . . . The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies,” it concludes in a special article in its monthly bulletin published on Thursday.

The ECB argues that the 16-country eurozone had “remained very close to external balance”, even though the large trade surplus of Germany, its largest member, is seen by many economists as restricting growth prospects elsewhere in the region.

Since the outbreak of the crisis, the imbalances have narrowed. However, the report argues that such trends are likely to be temporary. Cyclical factors that led to a narrowing, such as lower oil and commodity prices, have gone into reverse. At the same time, structural factors that contributed to the build-up in imbalances remain – including the lack of a social “safety net” in emerging Asian economies, which has encouraged domestic saving, and the desire of countries to build up reserves as insurance against future crises. Moreover, differences in growth rates have widened, with export-led emerging economies becoming an increasing source of global growth, the ECB adds.

Speaking in Washington, Jürgen Stark, ECB executive board member, said Asian emerging market economies were powering global growth, with prospects still weak in many advanced economies. “Questions can be raised as to whether such an uneven pattern of the recovery will prove sustainable.”

He warned that advanced economies would “continue to face severe macro-economic imbalances in the years to come”, as highlighted by the dramatic deterioration in public finances. “We may already have entered the next phase of the crisis: a sovereign debt crisis.”

Mr Stark concluded: “There is no doubt that the crisis will leave us a heritage of severe macro-economic imbalances. Dealing with them will represent one of the most daunting challenges for policymakers in modern history.”