Most of the policy discussions in global finance have been about the trade imbalance between China’s current account surplus and the US’s current account deficit. Of course, this gap has closed markedly with the recession but the trade imbalance continues to be the focus of many who are worried about the composition of the global recovery. The imbalance problem has driven arguments for a yuan appreciation.
What has been less emphasized is the imbalance on the other side of the world between Germany and the rest of the EU.[1] This imbalance contributes to the Greek sovereign risk problem and the EUR decline. An EMU imbalance makes the PIGS debtors to Germany and to a less extent France. What is called for with a China imbalance is a revaluation, yet this is not possible in the current EMU. There has to either be a transfer payment (default/bail-out) or large real wage adjustment in Greece. The euro may now need a rebalance adjustment premium that will overhang the exchange rate.
[1] Both Germany and France have savings rates above 10% while Greece has a rate as measured by the OECD that is negative. The trade imbalance is reflected in savings imbalances.
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