The Deficit Tango

Today, much of the world is fixated on current-account imbalances, with surplus countries demonized by deficit countries for supposedly hoarding demand, and deficit countries demonized by surplus countries for their supposed profligacy. But, while the preoccupation with imbalances is justified, the assumptions often underlying it are not.


GENEVA – During the early 2000s, there were myriad warnings that the world economy was headed for a crisis, owing to large and persistent external imbalances. The doomsayers turned out to be only half right: the world economy did go into a tailspin, beginning in the summer of 2007, but not because of the imbalances.

Instead, the Great Financial Crisis was rooted primarily in excessive risk-taking by financial intermediaries – a result of the poor regulation and supervision that emerged from earlier financial liberalization. Current-account balances did not even correlate with performance through that crisis.

To be sure, within the eurozone, those countries with large and persistent external deficits were hit hard by a crisis that surplus countries generally avoided. Yet Australia’s current account has been in deficit every year since 1975, with the gap averaging about 4% of GDP, and it made it through the crisis and subsequent recession virtually unscathed.

At the opposite end of the spectrum, Switzerland’s current-account surplus has averaged 7.8% of GDP since 1981. It peaked at 14.9% of GDP in 2010, and in 2016, it still stood at 12%. Yet the crisis inflicted significant damage on the Swiss economy, because it hit the country’s two largest banks hard.