Can the Euro Area Play a Stabilizing Role in Balancing Global Imbalances?

Philip Arestis and Malcolm Sawyer ()

Chapter 3 in Euroland and the World Economy, 2007, pp 53-71 from Palgrave Macmillan

Abstract: Abstract The purpose of this chapter is to investigate the extent to which prevailing global imbalances can be reduced and removed without triggering a global depression. The President of the European Central Bank (ECB) in his monthly press conference on 6 July 2006 was very clear about the dangers posed by global imbalances. He suggested that ‘The risks to the outlook for economic growth appear to be balanced over the short term, while in the longer term downside risks prevail, relating mainly to potential further oil price rises, a disorderly unwinding of global imbalances and potential pressures for increased protectionism’ (Trichet 2006, p. 1). If the main imbalance is located in the United States, it is conceivable that there could be orderly private sector adjustments, which could remove the imbalances in question. In the United States, the private savings (to-GDP) ratio may rise gradually as interest rates increase and the housing market slows down. The rest of the world could move in the opposite direction, namely the savings (to-GDP) ratio decreases gradually (or the investment ratio increasing). But there is no evidence for either possibility. It is also conceivable that a sharp fall in the dollar might do the job. But the dollar has been falling for the last three years or so and the global imbalances have worsened rather than improved. If these possibilities do not materialize, then more abrupt and disorderly adjustment is possible: overshooting of exchange rates, large increases in interest rates globally, and sharp contraction in global economic activity.

Keywords: Interest Rate; European Union; Monetary Policy; Fiscal Policy; Euro Area (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1057/9780230377554_4

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