Title: Macroeconomic performance and global capital flows: is there a role for Europe to play?
Abstract: What role will Europe play in shaping the future structure of international capital flows? Can Europe be a key player in redressing the global imbalances that threaten the stability of the world economy? In this paper I address these issues by looking at Europe’s savings and capital flows. Looking at the global economic outlook we can identify three broad patterns that have emerged over the last decade. First, the US current account deficit climbed to $665 billion in 2004 from $136 billion in 1997. Second, the $430 billion increase in the emerging market economies’ aggregate current account surplus was the principal counterpart to the US deficit. This surplus is mainly due the impact of the emerging market financial crises of the mid to late 1990s followed by the rise in the price of oil, which has pushed the Middle East and Russia into large surpluses. As a result of these changes, Asia has emerged as a key player in global capital flows. Many fear that the current position is not only unsustainable in the long run but also likely to prove highly volatile in the short term, implying a generally unstable macroeconomic environment. So far, the system has been kept in balance by shifting the adjustment to countries with floating currencies. The euro has taken most of the burnt and has appreciated by about 20% since 2003. This adjustment, however, does not address the fundamental problem of misplaced global capital flows, which is divergent savings rates. The paper argues that global adjustment requires that Europe should play a greater role in world demand. As long as Europe – and Japan – retains structural excessive savings, the world economy’s dynamism will continue to depend very narrowly on US excess consumption and on emerging Asia’s excess investment. A necessary condition of successful global adjustment, therefore, is greater expenditure, in relation to potential output, in countries running big current account surpluses and vice versa for those in deficit. Even if the big shift must be among the developing countries, Europe has a role to play through adopting policies devised to generate additional demand, which would tend to push the overall EU current account into deficit.
Publication Year: 2005
Publication Date: 2005-01-01
Language: en
Type: article
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