Causes and Consequences of Economic Imbalances: Comparison of US-Asia and Europe
©2014
Textbook
88 Pages
Summary
In the past ten years, huge economic imbalances among US-Asia as well as eurozone countries have built up which have led to numerous crisis situations. Thus, the goal of this book is to find out if economic imbalances are sustainable or if they need to be rebalanced? What role do distinct national policies play? The author is going to compare the imbalances of US-China with the intra-euro imbalances of Germany, Spain and Italy. Firstly, the historical development of the economic imbalances is presented in order to point out the unprecedented height of the mentioned imbalances. Furthermore, the author is analyzing the causes of imbalances by presenting the development of the competitiveness, the saving-/investment rates, the financial markets as well as the different national policies. It is shown that distinct national policies were the underlying causes for the development of such high economic imbalances. After having seen the historical development as well as the causes, the author describes the possible costs and benefits of having imbalances as well as the implications of the global financial crisis and the current European crisis. Due to the increasing globalization, the financial crisis spread fast and led to huge losses and decreasing investor’s trust in European countries. This resulted in the European crisis which subsequently could also endanger the global economy. Because of the huge crisis’ impact, traditional and alternative balancing channels are also compared. Despite supporting measures such as restrictive fiscal policies and financial assistance, Europe is still suffering from an economic downturn whereas the US returned to a slow economic recovery. At the end, the author concludes that global imbalances need to be rebalanced in order not to avoid reaching an unsustainable level. The occurring as well as rebalancing of economic imbalances highly depends on distinct national policies. Unless the international coordination and cooperation increases, economic imbalances will continue to occur and will lead to economic crises when reaching an unsustainable level.
Excerpt
Table Of Contents
VIII
List of Tables
Table 1 Development of the Global Financial Crisis 2007-2010 ... 300
Table 2 Development of the European Economic Crisis 2009-2012 ... 34
Table 3 European Austerity Programs announced in 2010 and 2011 ... 45
Table 4 Monetary Policy after the Financial Crisis 2008-2012... 48
Table 5 Functioning of Alternative Balancing Channels ... 51
Table 6 Current Economic Development 1
st
Quarter 2012 ... 52
Table 7 Scenario Analysis based on Policy Choices ... 53
IX
List of Abbreviations
CA
Current
Account
CPI
Consumer
Price
Index
ECB
European Central Bank
EFSF
European Financial Stability Facility
EFSM
European Financial Stability Mechanism
ESM
European
Stability
Mechanism
EU
European
Union
FDI
Foreign Direct Investment
GDP
Gross
Domestic
Product
GNI
Gross
National
Income
G-7
Group of 7 International Finance Group
IMF
International Monetary Fund
LTRO
Long-term Refinancing Operations
NCU
National Currency Unit
OECD
Organization for Economic Co-operation and Development
PIIGS
Portugal, Ireland, Italy, Greece, Spain
UK
United
Kingdom
UNCTAD
United Nations Conference on Trade and Development
US
United
States
USA
United States of America
1
1. Introduction
1.1 Problem and Objective
"The economic health of every country is a proper matter of concern to all its neigh-
bors, near and far."
-Franklin D. Roosevelt
1
This quotation reflects the importance of economic imbalances for the global economic
environment. As seen in the past, huge economic imbalances of emerging countries
have resulted in a number of crises such as the Mexican tequila crisis, Asian crisis or
the Argentine crisis. In the past ten years, major economic imbalances have been
concentrating among a small number of countries. The main deficit countries such as
USA and Spain have been mirrored by current account surplus countries in Asia,
Middle East as well as in Europe. Already in 2004, the persistency and growing size of
the global imbalances have led to the speculation about a disorderly unwinding in the
future. In 2007, the global financial crisis started in USA and rapidly spread across
major economies due to the high financial integration. Out of the financial crisis, the
current eurozone crisis developed which is posing a major threat to the global econo-
my.
2
"Global imbalances can be defined as widening external positions of systemically
important economies that reflect distortions or entail risks for the global economy."
3
External positions are shown in the current accounts which show huge deficits or
surpluses caused by distortions or/and pose a risk for the global economy. Distortions
can arise due to policy decisions taken by the public or private sector. The current
account development of a single European country does not fit the definition, but a
country's possible contagion effect in case of a crisis and the overall European devel-
opment is systemically important and poses a significant risk to the global economy.
Hence, in the author's point-of-view the current account development from US-Asia as
well as the intra-euro economic imbalances can be considered as global imbalances.
According to Blanchard and Milesi-Ferretti (2011), global imbalances can be consid-
ered as good or bad for the global economy. In the optimistic point-of-view, it may be
desirable to hold economic imbalances in a globalized world, e.g. to counteract ineffi-
ciencies in the national economy. In contrast to that, in the pessimistic view imbalances
1
Kerry 2012, p.1
2
Dullien et al. 2010
3
Bracke et al. 2008, p.5
2
increase the risks of economic crises and therefore, can be regarded as the underlying
causes of economic crises.
Global imbalances not only include the trade flows but also capital flows resulting in a
country's level of external indebtedness. The US is said to have more time than Europe
to recover from crisis' impacts due to lower borrowing costs. European borrowing costs
significantly diverged since the financial crisis and resulted in huge borrowing costs for
current account deficit countries. Therefore, this book is going to compare the causes
and consequences of the US-Asian and European economic imbalances and discuss
possible ways to rebalance. Under consideration of the optimistic and pessimistic view,
the goal is to find out if global imbalances are sustainable or is it necessary to re-
balance? How do distinct national policies impact the occurrence and rebalancing
process of economic imbalances?
1.2 Methodology and Theory Approach
As mentioned in the definition of global imbalances, policy interventions can lead to
distortions in external positions which may pose a risk to the economy. Those policy
interventions include foreign exchange interventions, macroeconomic as well as
structural policies and regulations of national financial markets and can be based on a
misjudgment of the current trade and financial circumstances.
4
This study will try to
answer the research questions by applying the Polanyian Dynamics theory since it takes
into consideration the importance of distinct national policies. According to Karl
Polanyi
5
, a Hungarian political economist, the Great Depression was not just an eco-
nomic crisis but the result of deliberate policy decision on a national level which caused
unintended consequences. In other words, there is a conflict between democratization,
i.e. following national goals, and economic liberalization in the form of open markets
for goods and money. The latter entails that distinct national policies directly impact the
economic development of the nation itself as well as other countries. In addition to that,
the market outcome is usually not in favor of the participants and leads to the market
dictating the development, e.g. resulting in national taxpayers bearing the losses in case
4
Bracke et al. 2008
5
Karl Polanyi was born in 1886 and died in 1964. He studied in Hungary as well as in Austria and later
on moved to Canada and adhered to socialist conviction. He is known for his book "The Great Transfor-
mation". (Levitt 1996)
3
of a crisis. By dictating the conditions, the economic sphere weakens the democratic
character of a nation.
6
Therefore, the causes and consequences of global imbalances on the economy will be
analyzed under consideration of national policies' influence. In order to be able to
answer the research questions the study's methodology is mainly based on a qualitative
approach using the Polanyian Dynamics theory. The deductive and descriptive analysis
will be conducted with the help of secondary data and will be based on chosen coun-
tries. Since China has been playing a major role in the building up of global imbalances,
it will be examined throughout the study. Concerning Europe, Spain, Italy and Germany
will be taken as examples since all three of them are economically very important
countries in the eurozone and have been heavily discussed since the start of the Europe-
an economic crisis. Concerning the data collection, the study will concentrate on the
development until the end of 2011 in order to ensure the data comparability. Only a few
important European policy choices made in the first quarter of 2012 will be mentioned.
The book is structured into seven chapters. Before being able to understand the causes
of economic imbalances, it is necessary to understand the development of the balances
of payments. Hence, the current account development of the past twenty years will be
examined. Additionally, the debt structure is explained since it has an influence on how
vulnerable a country is towards economic changes. After having seen the current as well
as historical current account development the causes of economic imbalances will be
described in chapter three. Differences in economic growth and competitiveness, in the
saving-/investment rate and in the financial markets will be explained. At the end of the
chapter, the focus lies on showing the influence of national policies on the current
account development. Based on the described causes, economic imbalances have been
building up which can lead to benefits as well as costs. Those are presented in the
following chapter whereas also the implications of the global financial crisis as well as
the European crisis are analyzed. When realizing the impact on the global economy the
question arises what kind of rebalancing possibilities do the countries have. Therefore,
the traditional as well as alternative balancing channels are discussed. With the help of a
comparison of US-Asia and Europe as well as the theory, the author is trying to answer
the aforementioned research questions and will comment on the main points.
6
Eichengreen 2008
4
2. Key Indicators of Imbalances
In this section, the author is going to have a closer look at the key indicators of econom-
ic imbalances in order to be able to thoroughly analyze the causes as well as the
consequences of economic imbalances. Therefore, the balances of payments of USA,
China as well as of the chosen European countries are being presented.
At first, the author is going to have a look at the countries' current accounts which is
followed by an analysis of the capital account and the resulting debt structure.
7
2.1 Overview of Economic Imbalances
The current account is one part of the balance of payments account of a country and is
defined as the sum of exports minus the sum of imports of goods and services.
8
Before
the author presents the global imbalances of the chosen countries, the historical and
current development of the overall world current account is shown.
In the past thirty years, the world economy has undergone a significant increase in
globalization including trade as well as financial markets' liberalizations. This led to a
higher global trade openness
9
which rose by 16% up to 59% from 1980 to 2010. In
1980 the sum of current account balances as share of world GDP added up to 2%. Even
though imbalances already increased significantly after the second oil price shock in the
1980s, they never hit a level of 6.3% of world GDP, like in 2008.
10
After a short decrease in the beginning of the `90s, the aggregate current account
positions started to rise again in the middle of the century and continuously grew up
until the global financial crisis in 2008. The total value of global current account
balances has doubled since the 1990s which gives a better overview to which extent
those imbalances rose. After the financial crisis hit the world economy, imbalances
decreased rapidly and were almost reduced to nearly half of the pre-crisis level. As one
can see in the graph below, the current account positions slightly began to increase
again in 2010 and continued to do so up until the beginning of 2011.
7
Krugmann & Obstfeld 2009
8
Ibid.
9
Global trade openness shows the exports plus imports in relation to GDP
10
Cecchetti 2011
Balance of payments shows all international monetary transactions of a country for
a certain time period and is according to the broader definition comprised of the
current account and capital account.
Figure
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14
The US current account deficits built up because of an increasing gap between
domestic demand and supply of goods and services. The rising imports mainly came
from Asia, Middle East and Russia. China's importance as an importing partner
increased constantly since the 1990s. The volume of imports from China rose by 75%
from 1995 until 2000.
15
The current account development will be shown with the help
of three different time periods.
Global Imbalances: 1990 until 2000
Since the 1980s the US had only once a current account surplus which was in 1991.
From 1990 until 1997, the US current account deficit in relation to the GDP was
relatively small. It always stayed below 2% of GDP but started to increase rapidly after
the Asian crisis in 1997/1998. The deficit even reached about 4.2% of GDP in 2000.
Until the Asian crisis, Asia as a region
16
ran current account deficits whereas China also
accumulated moderate current account surpluses. In 1993, China switched from
surpluses into a deficit due to a significant increase of FDI. China's current account
surpluses rose constantly after 1995 and were only deflated by the Asian crisis as well
as the dot-com bubble. The so-called twin surpluses
17
started to develop after the Asian
crisis as a protection against future crises. In connection with the twin surpluses, a
continuous increase in foreign exchange reserves started to take place.
18
Global Imbalances: 2000 until 2008
During 2000 up until 2008, global imbalances started to widen as well as they proved to
be persistent. The US current account deficit continued to rise up until the burst of the
dot-com bubble in 2001. The US exports went down by one fifth of their world market
share from 2002 until 2003.
19
After 2002 the US current account deficits rapidly
increased up until 2006. As one can see in the graph below, the growing current account
deficits of the US were reflected by increasing Chinese current account surpluses.
14
Author's calculations based on IMF 2012a; IMF 2012b
15
Glyn 2005
16
Including developing Asia, ASEAN-5 and newly industrialized Asian economies. (IMF 2012c)
17
Twin surpluses are surpluses on both the current account and capital account. (Yongding 2006)
18
Obstfeld & Rogoff 2009
19
Glyn 2005
7
Figure 2 US-China Current Account Balances as % of GDP 1990-2011
Source: Author's illustration based on IMFStat 2012
China's current account surplus went from 2.6% in 2003 up to 5.9% in 2005 and even
reached a so far unknown height of 10.1% in 2007. The rise in current account imbal-
ances went on up until the financial crisis in 2008 whereas the US deficits already began
to decrease in 2006 due to falling housing prices.
Global Imbalances after 2008
The magnitude of the global imbalances up until 2008, already gave hints to the risk of
a disorderly unwinding of the imbalances. The decline of US current account deficits
accelerated after the financial crisis in 2008 and reached its lowest point since 1998 by
going down to 2.7% of GDP in 2009. In comparison to around 6% in 2006 it was a
decline of more than 50%.
Alongside the sharply reduced deficits of USA, China's current account surpluses
started to decline significantly after 2008. It nearly was halved down to 5.2% of GDP in
2009. Since 2008, China's current account surplus has been constantly falling as the
domestic demand has been increasing. Its current account surplus declined up to 2.8%
of GDP in 2011. According to the IMF, Chinese current account surpluses will most
likely stay like that.
20
2.3 Balance of Payments of Europe
Since 1990, the European Union as a whole has been close to balance. Even after the
introduction of the Euro, the eurozone current account balance stayed on average below
1% of GDP. The eurozone can be divided into Northern and Southern countries. The
20
IMF 2012d
8
6
4
2
0
2
4
6
8
10
12
USA
China
8
Northern countries are comprised of Austria, Finland, Germany, Luxembourg and the
Netherlands and mainly classified as having persistent current account surpluses since
the Euro introduction. In contrast to that, the Southern countries including Cyprus,
Greece, Ireland, Spain and Portugal are characterized by having constantly current
account deficits.
21
Below, Germany as a representative of the Northern countries and
Spain as a representative of the Southern countries will be examined with the help of the
same time periods used in the previous analysis of the current account development.
Additionally, as mentioned before, Italy will be included in the analysis.
Economic Imbalances: 1990 until 2000
In 1990, Germany had a moderate current account surplus which went into current
account deficits and stayed below 2% of GDP in the following years. One reason for
this development was the German reunification. Having a look at Italy and Spain, one
can see that the current account development of those two countries was very different.
Spain accumulated current account deficits during the whole period which fluctuated
between a nearly balanced position of -0.1% of GDP in 1997 and 3.6% in 1991. Shortly
before the Euro introduction in 1999, the current account deficits significantly in-
creased. Contrary to Spain, Italy mainly had current account surpluses up until the Euro
introduction. In 1993, the current account moved from a deficit to a surplus and had its
peak with 3.2% of GDP in 1996. Overall, the period from 1990 up until 2000 was
characterized by having moderate deficits as well as surpluses in the analyzed coun-
tries.
22
Economic Imbalances: 2000 until 2008
After the Euro introduction, the past behavior of having current accounts close to
balance was reversed and huge intra-euro imbalances emerged. With the creation of a
single currency union, trade and capital flows were accelerated in the following years
because of eliminating barriers and promoting European integration.
23
In 2002, Germany had its first current account surplus since ten years. Starting in 2004,
Germany's current account surpluses increased heavily, amounting up to 7.5% of GDP
in 2007 which was after China the world's second largest surplus.
24
As shown in the
graph below, this was mainly mirrored by the growing Spanish current account deficits.
Those reached its peak in 2007 amounting up to nearly 10% of GDP. At the same time,
21
Holsinki et al. 2010
22
IMFStat 2012
23
Zemanek et al. 2010
24
Hnat 2010
9
Italy also went into the deficit area but compared to Spain those current account deficits
remained quite small with a peak of 2.9% of GDP in 2008.
Figure 3 Euro Area Current Account Balances as % of GDP 1990-2011
Source: Author's illustration based on IMFStat 2012
Economic Imbalances after 2008
The global financial crisis also showed its impact on the current account development in
European countries. Germany's current account surplus went down by 1.5% of GDP
from 2007 until 2009. After this drop, the current account surpluses stayed close to 6%
of GDP. During the same time, Spain's deficit declined by 5.2% of GDP and in the
following years, it went even further down which was partly due to the burst of a
housing bubble. Italy's current account deficits have been growing after the financial
crisis. Even though Spain's current account deficits were falling after the financial
crisis, German current account surpluses remained relatively high which are mirrored by
deficits in Italy, Spain and also the European periphery.
25
2.4 Comparison of Debt Structure
After having had a look at the current account as one part of the balance of payments, it
is important to also look at how the current account is financed. The capital account
26
is
the mirror of the current account and is also one of the key indicators for imbalances.
The above mentioned current account imbalances can lead to an accumulation of
25
Priewe 2011
26
Capital account is the broader definition whereas the narrower meaning defined by the IMF divides
capital account into financial account and capital account (where financial account includes the main
transactions). (Ajami et al. 2006)
15
10
5
0
5
10
Euro area
European Union
Germany
Italy
Spain
10
external debt. Spain's and Germany's external debt was constantly rising in the previous
ten years and even reaching 165.4% of GDP in Spain and 160.4% of GDP in Germany
in 2011 (see Appendix 2).
27
In comparison to that, Italy's and the US' external debt
level in percentage of GDP is significantly lower (around 45%-65% lower). Concerning
the analyzed countries, China has the lowest external-debt-to GDP ratio which is around
9.3% (in 2010).
28
Not only the overall external debt-to-GDP ratio is an indicator for rising imbalances
which might develop in an unsustainable way, also the percentage of short-term debt
reveals risks in growing economic imbalances. Italy and Spain's short-term external
debt as percentage of GDP was between 25% and 35% between 2000 and 2007 (see
Appendix 3). USA had its peak with 40% of GDP in 2007. Since 2007 Spain's external
short-term debt rapidly rose up to the same level as Germany. Its external debt always
included a high amount of short-term liabilities, even reaching 55% of GDP in 2010.
The above mentioned facts show that Spain as well as Germany largely depend on
external debt which mainly consist of short-term liabilities.
29
Since large private and public spending can lead to an unsustainable current account
development, the debt structure has to be analyzed more in detail. For this reason, the
Godleyan Sectoral Balances Identity will be looked at in order to find out which sector
is mainly indebted.
This means if the private or public sector has a deficit, it has to be financed either by the
other domestic sector or by the external sector or by a combination of both.
30
Sectoral Financial Balances US-Asia
Since the US constantly ran current account deficits which increased rapidly up until
2006, the external sector development has been staying positive. In connection with the
public deficits which started again in 2001, it led to twin deficits. The public deficit
reached its peak with 11.6% in 2009 after private debt had to be taken over by the
public sector due to the impact of the financial crisis. Such a high level of public sector
27
IMFStat 2012
28
Author's calculations based on The World Bank 2012
29
IMFStat 2012; China: The World Bank, 2012
30
Papadimitriou & Wray 2011
Godleyan Sectoral Balances Identitiy states that the sum of public sector
financial balance (=government budget), private sector financial balance and
foreign sector financial balance (=capital account) equals 0.
11
deficit has been unprecedented in the previous twenty years. The public deficits led up
to a government debt of 103% of GDP in 2011 (see Appendix 4).
31
Figure 4 Sectoral Financial Balances as share of GDP, USA 1990-2011
Source: Author's calculations and illustration based on BEA 2012a; BEA 2012b
Having a look at the private sector financial balance, it becomes obvious that consump-
tion was financed by accumulating debt.
In contrast to that, the Chinese private sector financial balance has been staying positive
since 1993. It constantly increased in the following years, even reaching a surplus of
9.5% of GDP in 2008 (see Appendix 5). This was mirrored by a public as well as
external sector deficit. Thus, China's private claims on industrial countries, especially
the US, constantly grew. Whereas the public sector remained relatively small (below
4% of GDP) leading up to a general government gross debt of 25.8% of GDP in 2011,
the external sector was growing rapidly after 2004 leading to the twin surpluses.
32
In the
balance of payments account the surpluses were evened with the help of an excessive
accumulation of foreign exchange reserves.
33
All three sectors went down and moved
closer to 0 after the financial crisis hit.
European Sectoral Financial Balances
During the economic boom years, the private debt of the eurozone countries increased
by 35% of GDP per year (2005 until 2007). Thus, the main driving force behind the
increasing overall debt ratios prior to the crisis has been private debt in the Southern
31
IMF 2012f
32
Ibid.
33
Adams & Park 2009
15%
10%
5%
0%
5%
10%
Public Sector
External Sector
Private Sector
12
countries whereas the crisis as well as after-crisis years were characterized by rapidly
growing public debt.
34
Except for 1995 the German public sector financial balance has been staying below 5%
of GDP (see Appendix 6). After the Euro introduction, Germany accumulated high
private sector surpluses which financed external as well as public sector deficits.
35
Concerning the external sector the mirror of Germany is Spain with significant capital
account surpluses. Spain has accumulated huge deficits in the private sector financial
balance leading up to 11.9% in 2007. As one can see in the graph below, the private
sector deficits were mainly financed by high external sector surpluses as well as in
between by moderate public sector deficits up until 2009.
Figure 5 Sectoral Financial Balances as share of GDP, Spain 1990-2011
Source: Author's calculations and illustration based on IMF 2012d
After the financial crisis hit, the relationship between public and private sector switched.
Thus, the government deficits are mainly a result of the excessive private sector
spending prior to the crisis years.
In contrast to that, Italy's development after the Euro introduction showed constantly
moderate private sector and external sector surpluses which were accompanied by
public sector deficits (see Appendix 7).
36
Despite this moderate development in the
recent years, Italy has accumulated high public debt prior to that which led to the
eurozone's second highest public debt-to-GDP ratio amounting up to 120% of GDP in
2011 compared to the Spanish 68.5% and the German 81.5% (see Appendix 4).
37
34
Kouretas & Vlamis 2010
35
IMF 2012e
36
Ibid.
37
IMF 2012f
15%
10%
5%
0%
5%
10%
15%
Public Sector
External Sector
Private Sector
13
In order to put emphasis on the differences and similarities between the two regions, a
comparison of the main facts is going to be presented. According to the definition of
global imbalances US-Asia and Europe are considered to be systemically important
economic countries as well as regions. This is proven by the fact that Europe contribut-
ed 20% and US-Asia 46% to the growth of global imbalances.
38
When looking at the
current account development, Europe as a whole is quite balanced whereas USA as well
as China show huge current account imbalances. But when analyzing the different
member countries of the eurozone, one can also notice huge intra-euro imbalances. Both
regions, US-Asia and the eurozone, have high current account surplus countries like
China and Germany which are mirrored by deficit countries like USA and Spain
whereas Spain's peak was significantly higher than the US' deficit (in % of GDP). At
the same time, the current account developments of both changed rapidly after 2002. Up
to 2002, the surplus and deficit behavior was quite moderate in contrast to the widening
from 2002 up until the financial crisis. Afterwards, the imbalances started to decrease.
Concerning the debt structure, one has to state that all the countries' debt is mainly
influenced by the private sector which contributes the most part to the overall debt.
39
Both major deficit countries USA and Spain ran private sector deficits in the 2000s up
until the financial crisis. The difference lies in the public sector. Spain's private sector
deficit was significantly higher compared to the US and mainly financed by external
sector surpluses leading to a close to balance public sector. In contrast to that, USA's
external sector surplus was equally caused by the public and private sector. Looking at
the public and private sector development after the financial crisis, one can notice a
directional change in the analyzed countries where the private sector moved into a
surplus and the public sector deteriorated. The high current account deficit countries
were hit worse than the moderate or the surplus countries.
After having had a look at the key indicators of economic imbalances and at the current
situation in US-Asia as well as Europe, it is necessary to look at the causes of those
imbalances.
38
Roxburgh et al. 2009
39
Roxburgh et al. 2012
14
3. Causes of Imbalances
Before being able to understand the implications of the above described economic
imbalances as well as analyzing possible rebalancing channels, one has to take a look at
the sources of the imbalances. General determinants of the current account are, for
example:
Demographical development
Economic growth rates
Exchange rates
Terms of trade
Fiscal policies
40
Country differences in those determinants can lead to disequilibria. Referring to the
Polanyian Dynamics theory those differences mainly occur due to distinct national
policy decisions. They also have an influence on the competitiveness, the saving/
investment rate as well as the financial markets of countries. Hence, the author is going
to have a look at these factors. At the end, the national policies, especially the monetary
and fiscal policies, will be presented. The goal is to find out the main causes for the
economic imbalances described in chapter two and to examine if there are similarities or
differences between US-Asian and European sources of imbalances.
3.1 Economic Growth and Competitiveness
Differences in the economic growth rates between main trading partners as well as
competitiveness play a key role in the building up of economic imbalances. A loss of
competitiveness can result in current account deficits whereas a gain can cause current
account surpluses. Competitiveness can be measured with different indicators such as
unit labor costs, inflation rate and CPI-based real effective exchange rate
41
. An appre-
ciation of a country's currency can endanger its competitiveness and distort its trade
flows. Thus, the author is going to examine the economic growth in connection with
trade openness first and then analyze the differences in competitiveness mainly with the
help of the CPI-based real effective exchange rate.
40
Nickel & Vansteenkiste 2008
41
"
It measures the competitiveness and takes account of exchange rate movements and consumer price
developments
.
Ratio of domestic consumer prices to a weighted index of consumer prices in trading
partners." (Ricci et al. 2008), p.5
15
Economic Growth
In general, one can notice that the real GDP growth of the world amounted on average
up to around 5% from 2004 until 2007 which did not look risky at that moment.
42
But
when looking at the country level, the growth rates of the different countries diverged
significantly. China's real GDP growth increased rapidly after the Asian crisis and even
went up to 14.2% in 2007. Such a high real GDP growth is a sign for an unsustainable
development.
43
In order to be able to examine the influence of economic growth on the current account
development of different countries, one has to know the main trading partners. Included
in Germany's main trading partners are China, the US as well as Italy. In addition to
that, one of Spain's main trading partners is Germany. Thus, all the mentioned countries
are interconnected concerning their trade flows.
44
Figure 6 Real GDP Growth Rates in % 1990-2011
Source: Author's illustration based on IMF 2012h; IMF 2012i
When looking at the advanced countries, one can see above that Spain's and USA's
GDP growth was higher than Germany's, Italy's as well as the Euro area's GDP
growth. Due to an increasing domestic demand in Spain as well as in the US in connec-
tion with a significantly higher industrial production of the main trading partner
Germany, it supported the aforementioned current account deficits.
45
42
IMF 2012i
43
IMF 2012h
44
CIA 2012a
45
According to Grauwe, higher GDP growth rates in comparison to the main trading partners can lead to
relatively higher growing imports than exports. Since China is a developing country and also trades a lot
with other Asian countries, the economic growth is not being analyzed further here.
6
1
4
9
14
World
Euro
China
United States
Germany
Italy
Spain
Details
- Pages
- Type of Edition
- Erstausgabe
- Publication Year
- 2014
- ISBN (eBook)
- 9783954897384
- ISBN (Softcover)
- 9783954892389
- File size
- 1.8 MB
- Language
- English
- Publication date
- 2014 (October)
- Keywords
- Economic Imbalances Europe US-Asia Causes
