Paris Report 4: The New Global Imbalances

Global imbalances are back in focus. Central banks, international organizations, the G7 and the G20 are debating their causes and remedies. This Paris Report 4 – a joint CEPR-Bruegel initiative – aims to provide independent analytical foundations for the debate, particularly for the French G7 presidency. It brings together 17 contributions on global imbalances over the past century, their current configuration among key players (the United States, Europe, and China), and perspectives from lower-income countries. The first-best solution is well known: coordinated adjustment among major economies. The United States would raise national saving through fiscal consolidation; China would rebalance toward consumption; and Europe would increase investment. This policy mix would reduce current account imbalances at their source and lower the risk of destabilising spillovers. But such coordination is unlikely. The relevant question is how the global economy adjusts in its absence – and what this implies for the rest of the world. Absent coordinated adjustment, global imbalances will persist and their risks will shift to the rest of the world. The United States poses primarily financial risks, linked to its external liabilities and central role in the global financial system. China poses structural challenges, tied to its export dominance and industrial policies. Europe risks contributing to both through weak investment. In this environment, the rest of the world faces four objectives: creating buffers that help deal with crisis risks, particularly if the latter are accompanied by a breakdown in international cooperation with the US; mitigating the short-term impact of Chinese import competition, supporting structural transformation; and preserving the rules-based trading system. The last three objectives are in tension. Protectionist measures can shield domestic industries but risk undermining long-term competitiveness and trade integration. Conversely, rapid structural adjustment can impose significant social costs. The challenge is to balance these objectives without undermining the foundations of the global economy. The appropriate response is therefore a combination of resilience, adaptation, and cooperation.