In China the good news is that its economic rebalancing process seems to have become more determined than ever before, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China's adjustment.
Germany is currently running the largest trade surplus in the world, while the deficits of peripheral Europe are being squeezed down through unemployment – which is certain to remain high for many more years. Two weeks ago in a presentation at the EU Central Bank seminar that t the surge in European surpluses, which was largely matched before the crisis by the surge in deficits in peripheral Europe, is expected to be maintained even as surpluses in China and Japan, the other leading surplus nations, have dropped dramatically, but since these northern European surpluses can no longer be counterbalanced by deficits within peripheral Europe given how indebted and troubled are their European trade partners, the hope is simply to force them abroad. In a world with weak demand and deteriorating trade relationships, in other words, the northern Europeans have decided that rather than boost domestic demand they will resolve their domestic problems by absorbing far more than their share of global demand, to the tune of 2-3% of Europe’s GDP.
This is absurd. If they succeed it will only be temporarily and at the expense of their already-suffering trade partners, and as a consequence it will just be a question of time before global trade relationships get even nastier than they have been. Of course if trade relationships deteriorate enough, and so force the imbalances back onto Europe, the result will be a surge in German unemployment with no corresponding relief in unemployment in the periphery.
Asia Times
Michael Pettis
