Abstract
The purpose of this chapter is to investigate the extent to which prevailing global imbalances can be reduced and removed without triggering a global depression. The President of the European Central Bank (ECB) in his monthly press conference on 6 July 2006 was very clear about the dangers posed by global imbalances. He suggested that ‘The risks to the outlook for economic growth appear to be balanced over the short term, while in the longer term downside risks prevail, relating mainly to potential further oil price rises, a disorderly unwinding of global imbalances and potential pressures for increased protectionism’ (Trichet 2006, p. 1). If the main imbalance is located in the United States, it is conceivable that there could be orderly private sector adjustments, which could remove the imbalances in question. In the United States, the private savings (to-GDP) ratio may rise gradually as interest rates increase and the housing market slows down. The rest of the world could move in the opposite direction, namely the savings (to-GDP) ratio decreases gradually (or the investment ratio increasing). But there is no evidence for either possibility. It is also conceivable that a sharp fall in the dollar might do the job. But the dollar has been falling for the last three years or so and the global imbalances have worsened rather than improved. If these possibilities do not materialize, then more abrupt and disorderly adjustment is possible: overshooting of exchange rates, large increases in interest rates globally, and sharp contraction in global economic activity.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Angeloni, I., Kashyap, A., Mojon, B., and Terlizzese, D. (2003). ‘The output composition puzzle: A difference in the monetary transmission mechanism in the euro area and the US’, European Central Bank Working Paper Series no. 268, September, Frankfurt: European Central Bank.
Arestis, P. (2007). ‘What is the new consensus in macroeconomics?’, in P. Arestis (ed.), Is There a New Consensus in Macroeconomics, Basingstoke: Palgrave Macmillan, pp. 22–42.
Arestis, P., and Chortareas, G. (2006). ‘Monetary policy in the euro area’, Journal of Post Keynesian Economics, 28(3), pp. 371–94.
Arestis, P., and Sawyer, M. (2003a). ‘Does the stock of money have any significance?’, Banca Nazionale del Lavoro Quarterly Review, 56(225), pp. 113–36.
Arestis, P., and Sawyer, M. (2003b). ‘Inflation targeting: A critical appraisal’, Working Paper no. 388, Levy Economics Institute, September.
Arestis, P., and Sawyer, M. (2004). ‘Can monetary policy affect the real economy?’, European Review of Economics and Finance, 3(3), pp. 9–32.
Arestis, P., and Sawyer, M. (2006). ‘The nature and role of monetary policy when money is endogenous’, Cambridge Journal of Economics, 30(6), pp. 847–60.
Arestis, P., Biefang-Frisancho Mariscal, I., Brown, A., and Sawyer, M. (2003). ‘Asymmetries of demand for money functions amongst EMU countries’, Investigación Económica, LXII(245), pp. 1–23.
Bibow, J. (2003). ‘Is Europe doomed to stagnation? An analysis of the current crisis and recommendations for reforming macroeconomic policymaking in Euroland’, Working Papers Series no. 379, Levy Economics Institute of Bard College, May.
Bibow, J. (2007). ‘Global imbalances, Bretton Woods II, and Euroland’s role in all this’, Chapter 1, in this volume.
Brand, N., Burniaux, J.-M., and Duval, R. (2005). ‘Assessing the OECD jobs strategy: Past dimensions and reforms’, Working Paper, ECO/WKP16, Paris: OECD.
Centre for European Policy Studies (CEPS). (2005). ‘EMU at Risk’, Seventh Annual Report, CEPS Macroeconomic Policy Group, Brussels: Centre for European Policy Studies.
Coats, D. (2006). Who’s Afraid of Labour Market Flexibility?, London: Work Foundation.
De Grauwe, P., and Costa Storti, C. (2005). ‘Is monetary policy in the Eurozone less effective than in the US?’, CESifo Working Paper No. 1606, November.
Duisenberg, W. F. (1999). ‘Economic and monetary union in Europe: The challenges ahead’, in New Challenges for Monetary Policy, proceedings of A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 26–28 August, pp. 185–94.
Duisenberg, W. F. (2003). ‘Introductory statement, and questions and answers’, ECB Press Conference, 8 May, Frankfurt: Germany.
Eurobarometer. (2006). Public Opinion of the European Union, Standard Barometer 65, Spring.
European Central Bank (ECB). (2001). Monthly Bulletin, March, Frankfurt: Germany.
European Central Bank (ECB). (2003). ‘The need for comprehensive reforms to cope with population ageing’, Monthly Bulletin, April, Frankfurt: Germany, pp. 39–51.
European Central Bank (ECB). (2004). The Monetary Policy of the ECB, Frankfurt: European Central Bank.
European Central Bank (ECB). (2005). ‘The reform of the Stability and Growth Pact’, Monthly Bulletin, August, Frankfurt: Germany, pp. 59–73.
European Commission. (2000). ‘Public Finances in EMU — 2000’, European Economy — Reports and Studies no. 3, Brussels.
Forder, J. (2000). ‘The theory of credibility: Confusions, limitations, and dangers’, International Papers in Political Economy, 7(2), pp. 1–40.
Ghosh, A., and Phillips, S. (1998). ‘Warning: Inflation may be harmful to your growth’, IMF Staff Papers, 45(4), pp. 672–710.
Higgins, M., and Klitgaard, T. (1998). ‘Viewing the current account deficit as a capital flow’, Current Issues in Economics and Finance, Federal Reserve Bank of New York, 4(13), pp. 1–6.
IMF. (2005). World Economic Outlook, Washington D.C.: International Monetary Fund.
IMF. (2006). World Economic Outlook, Washington D.C.: International Monetary Fund.
Issing, O. (2003). ‘Evaluation of the ECB’s monetary policy strategy’, ECB Press Conference and Press Seminar, 8 May, Frankfurt: Germany.
Kleinknecht, A., and Naastepad, C. W. M. (2005). ‘The Netherlands: Failure of a neoclassical policy agenda’, European Planning Studies, 13(8), pp. 1193–203.
Kydland, F., and Prescott, E. C. (1977). ‘Rules rather than discretion: The inconsistency of optimal plans’, Journal of Political Economy, 85(3), pp. 473–92.
Rogoff, K. (1985). ‘The optimal degree of commitment to an intermediate monetary target’, Journal of International Economics, 35(1), pp. 151–67.
Sawyer, M. (2007). ‘The foundations of monetary policy in the new consensus framework: A partial critique’, in P. Arestis (ed.), Is There a New Consensus in Macroeconomics, Basingstoke: Palgrave Macmillan, pp. 82–96.
Stiglitz, J. (2003). ‘Too important for bankers: Central banks’ ruthless pursuit of price stability holds back economic growth and boosts unemployment’, The Guardian, 10 June.
Trichet, J.-C. (2006). ‘Introductory statement with Q&A’, Press Conference 6 July 2006, Frankfurt au Main: European Central Bank.
United Nations Conference on Trade and Development (UNCTAD). (2005). Trade and Developments Report, 2005, New York: United Nations.
Editor information
Editors and Affiliations
Copyright information
© 2007 Philip Arestis and Malcolm Sawyer
About this chapter
Cite this chapter
Arestis, P., Sawyer, M. (2007). Can the Euro Area Play a Stabilizing Role in Balancing Global Imbalances?. In: Bibow, J., Terzi, A. (eds) Euroland and the World Economy. Palgrave Macmillan, London. https://doi.org/10.1057/9780230377554_4
Download citation
DOI: https://doi.org/10.1057/9780230377554_4
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-35276-0
Online ISBN: 978-0-230-37755-4
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)