Global rebalancing: can the West grow out of the debt crisis?

Global rebalancing: can the West grow out of the debt crisis?

In this paper we explore the progress made to reverse the imbalances since the onset of the financial crisis.

The global financial crisis taught us that imbalances matter. Whilst trade deficits and surpluses can increase over a number of years they are vulnerable to a sharp halt in financing. Once this occurs, imbalances which have taken years to build up are forced to reverse in a matter of months. The US went through this process in 2007-08 and the eurozone is still going through it today.

However, whilst the imbalances have fallen, they remain significant and reducing them is still an aim of global policy makers. In particular there is the hope that deficits could be reduced in a growth friendly way through stronger exports to the surplus countries. 

In this Talking Point we explore the progress made to reverse the imbalances since the onset of the financial crisis. We find that the ‘winners’ from rebalancing to date have not been those who experienced the worst of the financial crisis. If the world is going to grow its way out of the crisis this will have to change with more demand finding its way into Western exports. Unfortunately prospects on this front do not look particularly bright.

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