Over the last few years, this picture has changed. America’s deficit has just about halved, and there has been a major reduction in the corresponding large current account surpluses around the world. Japan’s surplus has fallen dramatically so that it is now not much above zero. China’s surplus and the combined surpluses of the oil producers have just about halved.
What’s more, these trends may be set to continue. The oil price has been dribbling down and is now just over $90. At Capital Economics, we think that the price of Brent crude could be about $70 a barrel by 2020, compared to the 2008 peak of $143. This price weakness is being driven by a combination of increased supply coming onto world markets and increased energy efficiency. If we are right about the prognosis, then some significant surpluses are going to evaporate. Russia’s is almost completely gone already.
But there is a new element to this story. While most of the global imbalances have been on a course towards reduction, in the eurozone, what wasn’t an imbalance ten years ago has recently become one. Of course, from the beginning of the single currency there were significant imbalances within the eurozone, with large surpluses for Germany and the Netherlands offset by large deficits in Spain and several of the other smaller economies.
What has happened over the last few years, however, is that the surpluses run by Germany and the Netherlands have remained constant, but the group of weaker peripheral countries – Portugal, Italy, Ireland, Greece and Spain – has moved from small deficits to a surplus. The primary driver behind this change has been Spain. As recently as 2007, it was running a deficit of 10pc of GDP. The balance is now nearly zero.
The upshot is that the eurozone’s combined current account surplus is now about double the size of China’s, and roughly equal to the combined surpluses of all the oil-producing countries in OPEC. The effort to keep the euro together has involved a massive deflation of demand in the European periphery that has depressed aggregate demand for the world as a whole. The surplus run by the eurozone as a whole represents an implicit attempt to Germanise the union and to export its way out of economic weakness, in the process exporting recessionary forces around the world. One of the prime sufferers from this development has been the UK, since we are the eurozone’s single biggest export market and it is ours.
Let me put this more provocatively. Some of the forces responsible for the fundamental weakness of aggregate demand which lay behind the financial crisis have been attenuated and/or are on the way to petering out. If oil prices continue to fall this will be a massive boon to the world economy. Just as this improvement has occurred, however, the gathering failure of the eurozone has replaced it.
Some notable American economists are banging on about the idea of “secular stagnation”, that is to say, the notion that demand is going to be weak for an extended period for deep-seated, systematic reasons, and that accordingly economic performance will be weak – for years, if not decades, into the future. They are barking up the wrong tree. The formation of the euro and the way that it has been managed in a deflationary manner is now the single biggest cause of weak aggregate demand and poor economic performance. Cure the euro problem, and the whole world economy would be much stronger. I surely don’t need to remind you of how the euro problem can be cured.
Financial difficulties, not to mention crises, are well known catalysts for political change. All of Europe remains in a political hot seat. Scotland’s referendum vote nearly broke up the United Kingdom. Putin’s mendacity in Ukraine, leading to sanctions, followed by a sharp drop in the price of Brent crude oil since June, make regime change a real possibility in Russia.Back to top