Europe's rebalancing is not borne by Europe

By G.I. | WASHINGTON, D.C.

While doing some research for an upcoming article, I checked on the evolution of current account imbalances since the recession and was struck by how China and Europe have traded places. China's surplus has fallen from 10% of GDP in 2007 to a little over 2% this year (I'm using data from the IMF's April World Economic Outlook which is probably a bit out of date). China's GDP has grown a lot in dollar terms since 2007 so the decline in the absolute size of the surplus is much less impressive, from a peak of $421 billion in 2008 to $224 billion now. In the same period, however, the euro-zone has gone from a deficit of $96 billion to a surplus of $391 billion and by next year, its surplus will exceed China's in 2008.

Given the depth of the recession Europe's peripheral economies endured, one shouldn't be surprised that its current account balance has improved. What is truly remarkable is that peripheral Europe's improved current account has not come through rebalancing within the euro zone; Germany's surplus has actually grown, from $226 billion to $284 billion. In fact, the rebalancing of the rest of Europe has occurred primarily by forcing other countries to reduce their surpluses or increase their deficits. This is an unavoidable result of the European Central Bank's monetary policy. Since lower interest rates cannot seem to spur Germany to invest more and save less by enough to reduce its current account surplus, more of the work of stimulus must come through a weaker euro, which means it's the rest of the world that bears the brunt of peripheral Europe's rebalancing. This of course adds to the global saving glut, and is another reason not to expect long-term interest rates to shoot significantly higher any time soon.