The magnitude and persistence of current and capital account deficits and surpluses in different parts of the world has created an imbalanced situation with potential risks for global financial stability.
Global imbalances are reflected in large and persistent deficits or surpluses in the current and capital account balances. Current account deficits or surpluses are not harmful per se or undesirable as they allow for the inter-temporal smoothing of saving and investment needs across the global economy. However, if large imbalances persist for an extended period, they could pose systemic problems, including the risk of disruptive adjustments. Such phenomena may pose threats to the stability of the global economy. Thus, reducing excessive global imbalances and maintaining current and capital account balances at sustainable levels has long been at the heart of the global economic policy agenda.
Global imbalances reached their peak in 2006. The absolute value of all current account balances, the most common measure for global imbalances, accounted for 5.6% of global GDP. The imbalances prior to the crisis were defined by a high degree of concentration. The US, the largest debtor and consumer worldwide, accounted for the main share of the global current account deficit. On the other hand, a handful of countries contributed the largest share of the current account surplus, namely China, and several oil-producing countries.
In 2009, because of the impact of the global financial crisis, global imbalances narrowed by almost 1/3 from their pre-crisis peak. While part of this correction was structural, global imbalances increased slightly in 2015 to 3.7% of global GDP. Today, the United States remains the largest debtor country, although its current account deficit has been more than halved since 2006. Japan and China have also drastically reduced their current account surpluses, the former even moving to a deficit position.
Although overall current account imbalances are well below their pre-crisis levels, they are still relatively high and appear to be growing in some cases. Reducing these imbalances further, in an orderly manner, requires a gradual shift in global demand from regions with current account deficits to regions with current account surpluses. All major regions have a responsibility to introduce policies that will contribute to an orderly adjustment. Deficit countries should aim to increase their level of savings while surplus countries should strive to increase domestic demand. Furthermore, measures supporting exchange rate flexibility should be encouraged as it can facilitate the necessary adjustments across the world economy.
Global rebalancing is at the core of the work of the G20, of which the European Union is a full member. At the Seoul Summit in 2010, G20 Leaders committed to strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account balances at sustainable levels. Most recently, at the G20 Summit in September 2016, G20 Leaders reaffirmed in the Hangzhou Action Plan that sustained global rebalancing remains one of the core priorities of the G20 going forward. The G20 members put forward a set of growth strategies, which also promote global rebalancing. Monitoring of implementation of commitments over the years has been carried out in the G20 mutual assessment process (MAP). With technical support from the IMF, the MAP allows G20 members to identify and focus on persistent imbalances which may require further policy actions.
The European Commission, through its Directorate General for Economic and Financial Affairs, actively contributes to the work of the G20 by sharing its experiences and best practices in coping with intra-European imbalances. DG ECFIN constantly monitors and analyses the evolution of global rebalancing and its possible impact on the EU economy.