Are trade imbalances a problem?

Here is Martin Sandbu of the FT in his new book Europe’s Orphan: The Future of the Euro and the Politics of Debt on that topic:

In an integrated regional economy like Europe’s, it is improbable that every country is able to offer just the right investment opportunities to match the country’s own savings.  Countries that want to save more than they invest need to find a productive outlet for their savings.  Countries that can productively invest more than they are willing or able to save must find funds from the outside.  And so long as the fund that flow across borders are invested well, such flows can benefit lenders and borrowers alike.  Indeed, large asymmetries are not only compatible with efficient economic development but they can be vital for making it happen: Norway’s current account deficit reached 14 per cent of GDP in the late 1970s, but the capital is imported enabled it to build up one of the world’s largest oil industries.

I do not agree with all of Sandbu’s extended apologia for the euro, but this is nonetheless a highly intelligent, thought provoking book, to be read by anyone who follows contemporary macroeconomic policy.  Another point he makes is that the euro didn’t actually cause so many countries to give up the option of debt monetization, given they would have ended up borrowing in foreign hard currencies in any case.


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