Trichet Warns of Global Imbalances
European Central Bank President Jean-Claude Trichet hasn’t been my favorite figure throughout the duration of this economic crisis, but I do think he’s right to be emphasizing the importance of addressing the global imbalances in trade. Of course I’m sure part of the reason he’s ringing the alarm bells about this is that the Eurozone as a whole was close to balance between imports and exports pre-crisis, so the upshot of this diagnosis is that someone else has to change.
Still, he’s right. And neglect of this point is what does give me pause about the talk of a third stimulus. It seems to me that where more stimulus is really needed is in the surplus countries—Japan, China, the oil exporters. Aggregate U.S. demand probably should fall from where it was pre-crisis—it’s the only way to rebalance an unsustainable situation. But that means demand needs to emerge elsewhere.
12 Responses to “Trichet Warns of Global Imbalances”
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July 7th, 2009 at 1:09 pm
The thing is that we aren’t so reliant on exports that we actually have a huge stake in this issue. In a nutshell, that is why the Europeans are carping about this more than us: they have a lot more to lose from a global capacity-demand imbalance than we do.
July 7th, 2009 at 1:12 pm
NO,NO,NO.
A drop in aggregate demand = higher unemployment.
US imports will fall and total trade will probably fall.
Most countries will have to substitute public expenditures for private and they won’t want to spend on imported goods.
The proper solution is government stimulus by countries with underemployment, within their borders. That is especially true of Asian countries, which will see big drops in exports.
US consumers won’t be driving trade and thus it will decline.
July 7th, 2009 at 1:28 pm
Venus?
July 7th, 2009 at 1:45 pm
What would a global economy WITHOUT trade imbalances look like? Has such a thing ever existed? What would be the real economic consequences if every country’s imports and exports were relatively equal?
Mike
July 7th, 2009 at 1:50 pm
“The thing is that we aren’t so reliant on exports that we actually have a huge stake in this issue.”
In terms of % of GDP there’s not much of a difference in terms of the value of exports to the EU economy as compared to the US economy.
The main difference between the 2 in terms of trade balance is that the EU imports less as % of gdp than the US does. As my noted the EU was already a pretty balanced economy in terms of import/export demand.
Now thats not true of individual countries within either the eurozone or the eu-27 but taking them as single entities it is.
July 7th, 2009 at 2:39 pm
Consumption based upon credit is the old, discredited and now dying model. It isn’t coming back to the levels above even 1970 or so for a long long time.
Trillions of dollars of debt have been deflated away with a lot more of that to come. The faith that some policy move is going to get things back to how they were before is magical thinking.
Trichet knows the score so he is an especially tragic figure.
July 7th, 2009 at 2:51 pm
In terms of % of GDP there’s not much of a difference in terms of the value of exports to the EU economy as compared to the US economy.
I guess that depends on whether you are including internal (EU country to EU country) exports or not, because I believe if you include internal exports, exports account for something like 40% of EU GDP.
July 7th, 2009 at 3:22 pm
“I guess that depends on whether you are including internal (EU country to EU country) exports or not, because I believe if you include internal exports, exports account for something like 40% of EU GDP.”
Yes, the vast majority of the EU’s ‘exports’ are internal and can’t really be counted if you’re looking at the EU or the eurozone as a whole.
EU exports as a % of gdp represents around 30% of gdp but nearly 70% of that is ‘exports’ to other EU countries, with exports to non-EU countries representing around 10% of GDP.
July 7th, 2009 at 4:49 pm
Yes, the vast majority of the EU’s ‘exports’ are internal and can’t really be counted if you’re looking at the EU or the eurozone as a whole.
Sure, by definition. But I wonder if looking at exclusively external trade/the EU as a whole is the right thing to be doing. I would think that depends on exactly how much cross-elasticity those internal exports/imports have with potential external imports. Of course the same thing could be said of internal commerce in the U.S., but it is at least plausible to me that the elasticities are different.
July 7th, 2009 at 5:33 pm
I feel like people are always saying/writing that: “the trade imbalance is unsustainable.” They never seem to say why.
Why?
July 7th, 2009 at 11:07 pm
I don’t like Jean Claude Trichet either, even though I don’t know who he is. Was he possibly a left-winger for the high-flying Montreal Canadians of the ’70’s?
Just kidding. I’m guessing Matt doesn’t like him because he refuses to simulate the French economy to Matt’s satisfaction. I will say, though, it is hard to blame the French for their paltry $68 billion stimulus package when they put it into play a year before we do.
And when the French put money into play the put it into play. It doesn’t filter down through 50 different states and thousands of different localities where it is handed over to tens of thousands of private contractors and suddenly it’s hey, what do you know, half of the money has seemingly vanished into thin air!
As for the other half, the half that survives the process, that is mostly tax cuts (it is hard to rob tax cuts). So basically, we are blaming the French and the Germans for putting a piddling sixty something billion dollars each directly towards to job creation in their countries when America’s mighty stimulus package has created, what, 42 jobs so far?
July 8th, 2009 at 6:22 am
People talk about this like it’s our fault or something. What are we going to do, refuse to let the Chinese buy dollars? When foreigners are purchasing your currency, you will then have a trade imbalance. The Chinese chose to do it as a way of stimulating demand in their economy. Oddly, they felt that the only way to do that was to allow Americans to buy more Chinese produced goods than to have Chinese buy more Chinese produced goods. It was stupid, but easy. Now we have to deal with some of the consequences.