Crisis shows imbalances are not sustainable indefinitely

Written by Simon Tilford [1], 27 November 2008
From Financial Times

Sir, Paul Betts (“All for one, but none for all to revive Europe’s fortunes”, November 24) argues that Germany should wait for other countries to boost their economies (and hence demand for German exports) rather than taking steps to boost German domestic demand. This is close to advocating a beggar-my-neighbour strategy. If all developed economies were to respond to the economic crisis in this fashion, a deep economic slump would become inevitable.

If the financial and now economic crisis has shown anything, it is that global imbalances are not sustainable indefinitely. The Germans, Japanese and Chinese cannot run huge current account surpluses ad infinitum without at some point investors taking fright at the liabilities being piled up in the deficit countries. The days of external huge deficits in the US and elsewhere are over.

This has huge implications for Germany. Its export-led model will not now deliver economic growth, however good German companies are at holding down costs. Ignoring domestic demand and further increasing the economy’s dependence on exports is the last thing the German economy needs just now.