Global Current Account Imbalances: How to Manage the Risk for Europe. Bruegel policy brief 2005/02, December 2005

Ahearne, Alan and Von Hagen, Jurgen. (2005) Global Current Account Imbalances: How to Manage the Risk for Europe. Bruegel policy brief 2005/02, December 2005. [Policy Paper]

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Abstract

Summary. 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.

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