Unbalanced Europe

BRUSSELS – The G-20 governments have declared that competitive devaluations (or currency wars) must be avoided. Excessive external imbalances, they also argue, should be monitored and perhaps fought in a coordinated way.

Those resolutions sound mild. But there is no good reason to tackle these problems differently. After all, there are no instruments to enforce strict rules at the global level, and the unwinding of today’s global imbalances – led by some revaluation of the renminbi and China’s shift to a growth model based on stronger domestic demand – might be only a matter of time.

Europe’s internal imbalances, however, are a much knottier problem. The G-20 decided not to deal with the issue and agreed to treat the 27-member European Union as a single region. Defined that way, the problem disappears, because the current-account deficit of the EU as a whole is only about 0.35% of its GDP, even though individual member countries have very different external positions.

This bit of statistical legerdemain reflects the political sensitivity of Europe’s current-account imbalances, which stems from eurozone members’ inability to rely on the exchange rate to restore equilibrium. If an internal EU imbalance is to be corrected, deficit countries must accept real output losses, while surplus countries can maintain or even boost their growth rates.