Germany Is Not China

ROTTERDAM – There is little dispute that global imbalances in trade and capital flows are at least partly to blame for the financial crisis and ensuing recession that have rocked the world economy since 2008. But not all imbalances are created equal, so it is important to weigh the consequences of individual countries’ external accounts for global economic stability and prosperity.

The conventional story of the crisis is well known: rising home prices fueled private consumption in the United States in the early 2000’s, despite tepid wage growth. Together with the widening US budget deficit, America’s current-account deficit – already large – ballooned, mirrored by bulging external surpluses in China and, as oil prices spiraled, in oil-producing countries like the United Arab Emirates.

Europe, meanwhile, looked wonderfully well balanced, at least superficially, whether one considered all 27 European Union members or the 16-member eurozone. While the US ran current-account deficits of up to 6% of GDP, the EU and the eurozone rarely had a deficit – or surplus – exceeding 1% of GDP.

In the past year, however, it has become all too clear that all this was just an illusion. Beneath the surface, huge imbalances were building up, resulting in debt-fueled real-estate booms in the euro periphery. Germany and the Netherlands ran surpluses in the range of 7% to 9% of GDP, balancing the current account for the eurozone as a whole. But, by 2006, Portugal, Spain, and Greece were running current-account deficits of 9% of GDP or more.