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

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Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
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