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.