The global imbalance
A current account deficit is usually seen as a clear sign of macroeconomic problems. But every deficit is a surplus somewhere else. When there are many surpluses and deficits, there is a global imbalance that can cause instability. Just before the Great Financial Crisis, the global imbalance had reached 3% of GDP. During the Great Financial Crisis, countries with current account deficits found it difficult to finance themselves, but a weaker currency and a severe recession quickly rebalanced them.
In recent years, the global imbalance has increased again. As a percentage of GDP, it is now 2.2 per cent compared to 1.6 per cent in 2019. Raw material countries and especially countries that produce oil play a particularly large role in this, even more so than before the Great Financial Crisis, when the surpluses were mainly to be found in the countries in Asia where the world’s factories are located. As of then, the US economy still has a structural current account deficit. The world is still willing to finance American consumption, and all this is thanks to the privilege of the reserve currency. Yet this is less extreme than in the past. In 2006 and 2007, the US current account deficit was about 6%, now it is about 3.5%. It helps, of course, that thanks to the shale revolution the United States has become an oil-exporting country again.
The moment oil prices rise further, the imbalance will increase further. A further rise in the oil price is still the base case. Recently, however, the oil price has fallen somewhat. Not so much because of fears of recession but more because the marginal seller (Russia) and the marginal buyer (China) reached a new equilibrium price at USD 93 per barrel. Now, the price of oil has not fallen to $93 a barrel, but the price of oil is in backwardation and if you look at a two-year timeframe, $93 is now on the boards. There is still a fairly serious shortage of oil in the world. We are running down stocks and ten of the eight largest OPEC countries are struggling to meet production agreements. There has been a complete lack of investment for years and, even at this oil price, investment is so far behind that the problem is only getting worse.
The difference from the situation before the Great Financial Crisis is that the imbalance is now increasing at a time when economic growth is slowing down. Before the Great Financial Crisis the world economy was growing strongly. In combination with the monetary policy this created extremely favourable financial conditions. In other words, deficits could be financed quite easily. Now, it is precisely the weak growth that makes financing so much more difficult. The solution can only be a weaker currency until there is a balance again.
In a normal cycle, slower growth and tighter monetary policy should lead to lower oil prices and a quick return to balance. Now, the persistently high (and probably still rising) price of oil is causing the imbalance to increase. The only way to deal with this imbalance is through the currency, the ultimate outlet for any economy. Because the United States is now a net exporter of energy, the United States and thus the dollar are hardly affected. But other countries with rising deficits are. Take the Japanese economy, for example. For years, the country had a current account surplus, but due to the rising price of oil, this has suddenly turned into a deficit. The Japanese yen has weakened quite spectacularly this year, which is also due to the sharp contrast in monetary policy between the BoJ and the Fed. Another region with a sharply rising current account deficit is the eurozone. Within the eurozone, the imbalance is very visible. The countries in the North have absurd surpluses and the countries in the South have substantial deficits. The euro is too soft for the Northern member states and unfortunately still too hard for the South. But this imbalance cannot (yet) be adjusted by exchange rates since we have linked our currencies through the euro. It can only be solved by quitting the euro.
So the eurozone is an inherently unstable system. Now a large part of the energy for the eurozone came from Russia. In fact, all this energy was paid for in euros. Perhaps it was calculated in dollars, but the money flowing into Russia came back in the form of Russians spending their euros on football clubs, luxury yachts and houses in London and Paris. In addition, every self-respecting restaurant had a Russian section of the menu, that is, the section where the bottles of wine start from 1,200 euros a bottle. If there was any money left over, it was parked in European accounts. The oligarchs (wrongly) realised that they too were protected by the rule of law. Even the central bank dared to park reserves in euros. Those days are over; from now on Europe has to earn hard dollars to pay for its energy. If things go wrong, even the Arab oil sheikhs and Chinese billionaires no longer want to put money into the eurozone. After all, it could well be their turn in the next conflict. That is what happens when you use your currency as a weapon. So suddenly there is an acute current account deficit, something that can be solved by a further weakening euro. Only that weaker euro causes more inflation, something the central bank then has to combat by raising interest rates (except for Italy, right?). Every time financial conditions rapidly deteriorate, a big company or country falls. It could well be that this time it is the eurozone’s turn. For years, such a currency crisis in Asia or Latin America seemed a far cry from the past, but soon we will suddenly find ourselves in the middle of it.
