There is little dispute that global imbalances in trade and capital flows are at least partly to blame for the financial crisis and ensuing recession that have rocked the world economy since 2008. But not all imbalances are created equal, so it is important to weigh the consequences of individual countries' external accounts for global economic stability and prosperity.
The conventional story of the crisis is well known: rising home prices fuelled private consumption in the US in the early 2000s, despite tepid wage growth. Together with the widening US budget deficit, America's current-account deficit - already large - ballooned, mirrored by bulging external surpluses in China and, as oil prices spiralled, in oil-producing countries such as the UAE.Europe, meanwhile, looked wonderfully well balanced. While the US ran current account deficits of up to 6 per cent of GDP, the EU and the euro zone rarely had a deficit - or surplus - exceeding 1 per cent of GDP.
In the past year, however, it has become all too clear that all this was just an illusion. Germany and the Netherlands ran surpluses in the range of 7 per cent to 9 per cent of GDP, balancing the current account for the euro zone as a whole. But by 2006, Portugal, Spain and Greece were running current account deficits of 9 per cent of GDP or more.The Sino-US relationship resembles that between a mail-order company and a not-so-solvent client. The world's most populous country is the largest foreign creditor of the US government and government-sponsored enterprises such as Fannie Mae and Freddie Mac. China's official foreign-exchange reserves of more than US$2.5 trillion (Dh9.18tn), stemming from double-digit current-account surpluses and capital inflows, are mostly invested in dollar-denominated bonds.
Some commentators argue that Germany plays the same role within the euro zone that China plays in "Chimerica", the term coined by Niall Ferguson and Moritz Schularick to describe the symbiotic Sino-US economic and trade relationship. If one focuses solely on the current account side of the balance of payments, it may look that way. In 2007, as its external surplus reached a record of 7.5 per cent of GDP, Germany's biggest bilateral surplus of ?29.5 billion (Dh138.69bn) was with the US, followed by Spain, France, the UK and Italy. It ran its largest bilateral deficit of ?21.2bn with China, followed by Norway, Ireland and Japan.
But Germany did not accumulate foreign reserves the way that China did. On the contrary, German foreign reserves actually declined between 2000 and 2008. Whereas China is a large net recipient of foreign direct investment (FDI), Germany is a large net exporter of FDI. China's net FDI inflow totalled $94bn in 2008, compared with Germany's net FDI outflow of $110bn.Net FDI makes up about one third of Germany's capital account. More than half of these investments are within other EU countries, with a further 30 per cent going to the US. Germany's surplus is thus less damaging than China's, as it is used for investments that foster productivity gains, economic growth and job creation.
The Chinese surplus, on the other hand, being heavily skewed towards US government bonds, primarily boosts personal consumption.Nevertheless, the differences between China and Germany are far more substantial than the similarities - not least in terms of how they put their surpluses to use. Lumping all surplus countries together - or all deficit countries, for that matter - will not help us find a way to rebalance the world economy.
Heleen Mees is a researcher at the Erasmus School of Economics in Rotterdam. Her book Between Greed and Desire - The World between Wall Street and Main Street was published in the Netherlands in 2009.* Project Syndicate