It is not just up to Washington to correct global imbalances
16 Jan '06
10 min read
A Commentary By Rodrigo de Rato
Managing Director of the International Monetary Fund
European Affairs
A Publication of The European Institute, Vol. 6 No. 4
December 31, 2005
There appears to be a widespread belief among European policy makers that global imbalances are only an American problem and not a European one. Many Europeans will say that Europe is an innocent bystander, and what is necessary is for the United States, with its huge external current account deficit, to reduce its fiscal deficit, and possibly for China to revalue its currency. Both views are way off the mark.
Many countries need to share the burden of reducing global imbalances and sustaining growth. Furthermore, since these imbalances will eventually be corrected, one way or another, it is worth bearing in mind that a disorderly adjustment of global imbalances would harm all countries. Europe would certainly be hurt by a disorderly adjustment, and has an interest in avoiding such an outcome.
But what are these key global imbalances, and what can policy makers do about them? Symptoms of the current global imbalances are high current account deficits and rapidly increasing debt in the U.S. and corresponding surpluses in Japan, many Asian emerging market economies, and increasingly oil-producing countries, including Russia as well as countries of the Middle East. These imbalances are unsustainable, and if they are corrected in a disorderly way, through an abruptdecline in the U.S. dollar and rise in interest rates, growth and prosperity all over the world will be threatened. The longer they are left unaddressed, the more threatening they become.
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