Europe: Will Europe burst asunder?
Europe’s economies are split in two: the surpluses of the centre and the north, versus the deficits of the UK, France, and the Mediterranean and accession countries. As the imbalances become exacerbated, Charles Dumas asks if there is a get-out clause for the continent’s likely downswing.
While European imbalances cannot compete with the trans-Pacific main plot in pure scale, they are as large (and dangerous) relative to the economies concerned: which are not small. Europe’s GDP weighed in at just under $12 trillion in 2005, just below the US’s. Dividing the countries by current account surplus or deficits produces roughly equal size “half-Europe” economies in which the surplus countries’ current accounts are 5.5% of GDP and the deficit countries’ 3.3%.
There is regional coherence: surpluses are the central-northern European part of the Eurasian savings glut: Germany, Benelux, Scandinavia, Switzerland/Austria. Deficits surround them: in Britain, Ireland, France, Mediterranean Europe and central-eastern EU “accession” countries. As with the main plot, fixed exchange rate regimes seriously aggravate imbalances in Europe. And as with the main plot, imbalances are getting worse.
Of course a continent with a total overseas balance below 1% of GDP is going to have surplus and deficit countries – not necessarily a danger. Europe’s problem is that:
the imbalances are large and growing;
the whole continent depends for growth on the deficit countries’ demand growth, vulnerable as in the US;
the supply side is much less healthy and responsive than that in the US;
financial imbalances reflect labour-cost and other divergences that threaten the integrity of EMU.