I know that the theme of global imbalances has seen quite a bit of attention since the 2008 crisis but still I would like to stress the fact of how the Euro area is now the major contributor to current account imbalances in the world. According to the latest figures, the Euro area reported a 12-month cumulated current account of €244.5bn in March 2015 (2.4% of Euro GDP) which translates to roughly 0.40% of world GDP. This figure is substantially higher than the corresponding 2014 reading of €186.1bn (1.9% of Euro GDP).

If one takes a long-term look on country and country group current accounts a few major patterns will emerge:

current accounts table

  1. The increase in the current account surplus for China between 2001 and 2008 and its large correction since then.
  2. The corresponding increase of the German surplus which shows no signs of correcting.
  3. The large surpluses of oil producing countries, dependent though on high oil prices (they are projected to be only marginally positive during 2015).
  4. The US functioning as the world’s consumer up until the Great Recession and its strong correction since then (with the oil shale boom playing an important role).

One of the most important observations though is how the Euro area turned from a roughly balanced external balance (up until 2011) to a surplus larger than the combination of China and Japan for the 2013-2014 period. The result of this development, along with the US correction, is that the sum of the current account balances of this group of countries (Euro area, China+Japan, Russia + major Middle East oil producers and the USA) turned from a large negative value until 2006 to a surplus of over 0.55% of world GDP. The above are more easily illustrated in the following charts (based on the table data) for country

major countries current accounts

and country groups CA balances:

major groups current accounts

The above suggests that instead of a demand surplus in the 2001 – 2006 period (which could be tapped by the rest of the world), the world’s major countries now need the remaining (mostly emerging) part of the globe to run a current account deficit and borrow in order to maintain growth in the ‘first world’. In other words, the Euro area is now the group that fuels global imbalances and creates a ‘supply surplus’ which the world must consume if European countries will be able to emerge from their stagnation and large unemployment.

In order for the Euro area’s over -2.5% output gap to be lowered, surpluses of more than 0.4-0.5% of world GDP have to be maintained (under the current policy regime where Europe relies on external demand as a driver of its economic growth) in a world of deficient demand. Given the continuous slowdown of BRICS growth I wonder for how much longer this policy will remain successful.

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