The Global Imbalances: Janus-faced Adjustment

Global imbalances may have come down slightly since the lead up to the global crisis. but they still exist as the chart and table below make clear. China's surplus has come down but Germany's remains, which means continuing problems for southern Europe.

Resolution of the imbalances would help global growth, but it would require surplus countries to adjust as well.  Germany has benefitted from the Euro and repressed consumption, which led to a current account surplus and the export of capital to Southern Europe. This capital led to increased private debt in Spain and was used to inflate property prices.  But remember the problem has two sides - the capital exports and unproductive borrowing, leading to unbalanced current accounts. This means that the solution has two sides - adjustment by both Southern Europe and Germany.

China's recent import collapse means that it currently runs a $US60 billion surplus. The question is will the deficit countries continue to accept the huge surpluses of Germany and China or take measures to restrict imports.

There's a lot at stake in Europe right now and the Germans continue to moralise that Southern Europeans need to embrace further austerity. Germany needs to run a deficit not a surplus. Britain could also help out by abandoning austerity.