Europe's current account surpluses will prove fleeting

Sir, In arguing that Europe will bounce back in 2013 as Asia did after its 1997-98 currency crisis, Ruchir Sharma puts much weight on the prospect that the European periphery will move towards external current account surplus next year.

However, in making his case (“Why 2013 will be the year Europe bounces back”, December 19), Mr Sharma fails to draw a basic distinction between the Asian and the European external current account experiences, which has to raise questions as to the likelihood that Europe will indeed bounce back in 2013.

Asia’s move to sustained external current account surplus after its economic crisis was supported by large currency depreciations that underpinned major export booms. This allowed Asia both to return to rapid economic growth and to maintain a large external current account surplus.

By contrast, the European periphery’s prospective move to current account surplus next year is mainly a reflection of a sharp contraction in its imports that is, in turn, the result of the European periphery moving ever more deeply into economic recession. Absent major currency depreciations, one must expect that those current account surpluses will prove fleeting as imports return to more normal levels.

A more reliable indicator than the external current account balance as to whether Europe will bounce back next year is the mix of its macroeconomic policies. It would seem that, as long as Europe persists with major budget austerity within a euro straitjacket at a time that its banks are experiencing a credit crunch, the European economy will continue to falter. And it will do so even though its external current account balance might move increasingly into surplus.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Holder will regret his refusal to obey the Constitution
image 'Flood Wall Street' climate protesters take aim at their corporate allies
image 3 opportunities for better US-India defense ties
image Is Nicolás Maduro Latin America's new man at the United Nations?
AEI on Facebook
Events Calendar
  • 29
    MON
  • 30
    TUE
  • 01
    WED
  • 02
    THU
  • 03
    FRI
Thursday, October 02, 2014 | 9:00 a.m. – 10:30 a.m.
Campbell Brown talks teacher tenure

We welcome you to join us as Brown shares her perspective on the role of the courts in seeking educational justice and advocating for continued reform.

Friday, October 03, 2014 | 12:00 p.m. – 1:00 p.m.
Harnessing the power of markets to tackle global poverty: A conversation with Jacqueline Novogratz

AEI welcomes you to this Philanthropic Freedom Project event, in which Novogratz will describe her work investing in early-stage enterprises, what she has learned at the helm of Acumen, and the role entrepreneurship can play in the fight against global poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.