Distortions in the global economy that provided the backdrop to the financial crisis threaten to widen again and upset the world-wide recovery, the European Central Bank has warned.
In unusually-blunt language, the ECB has made clear its fear that governments are not doing enough to put the global economy back on a sustainable growth path – despite international policy initiatives in the past year.
“At the current juncture, global imbalances continue to pose a key risk to global macroeconomic and financial stability… The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies,” it concludes in a special article in its monthly bulletin published on Thursday.
The report’s inclusion in the ECB’s normally restrained monthly-bulletin, highlights the Frankfurt-based institution’s worries about the strength of the current economic rebound. In its monthly commentary on world economic developments, it also concludes that the US’s return to growth has “important characteristics of past jobless recoveries”.
The ECB shies away, however, from the dispute over China’s management of its exchange rate. The ECB also argues that the 16-country eurozone had “remained very close to external balance,” even though the large trade surplus of Germany, its largest member, is seen by many economists as restricting growth prospects elsewhere in the region.
Prior to the outbreak of the global financial crisis in August 2007, concerns rose about “imbalances” in the world economy as highlighted by the US’s large current account deficit and China’s massive surplus.
The ECB report points out that the exact role such imbalances played in triggering the financial crisis is hotly-disputed by economists, but says they had long been identified as “posing substantial risks to the global economy”.
Since the outbreak of the crisis, the imbalances have narrowed. However, the report argues that such trends are likely to be temporary. Cyclical factors which led to a narrowing, such as lower oil and commodity prices, have gone into reverse. At the same time, structural factors which contributed to the build-up in imbalances remain – including the lack of a social “safety net” in emerging Asian economies, which has encouraged domestic saving, and the desire of countries to build up reserves as insurance against future crises.
Moreover, differences in growth rates have widened, with export-led emerging economies becoming an increasing source of global growth, the ECB adds.
Among global policy initiatives taken to correct such imbalances, the ECB report highlights last September’s Pittsburgh summit at which G20 leaders pledged to promote better balanced current accounts. But striking a noticeably cynical tone, the report notes the experience of multilateral consultations on imbalances in 2006-07, after which commitment made “were not fully implemented by the economies involved”.