I quite liked Ken Rogoff’s policy prescriptions for global rebalancing.
Specifically, I thought Rogoff got two key things right.
First, He recognizes that Europe already is contributing to global rebalancing. The euro is kind of strong, especially against Asian currencies. And recent European growth has been domestic demand-led growth. Eric Chaney:
the euro area is currently enjoying a robust recovery, essentially fuelled by domestic demand ... Companies and consumers have proved more sensitive to the large monetary stimulus applied by the ECB since mid-2003 than most analysts had thought.
That demand growth is propelling exceptionally fast y/y growth in Eurozone imports – and has pushed the Eurozone current account into a significant deficit.
Consequently, Rogoff emphasizes the need for Europe to avoid taking policy actions – such as Germany’s VAT increase -- that risk slowing European demand growth rather than supply-side reforms whose short-term impact on demand is ambiguous.
“Europe, for its part, could agree not to shoot its recovery in the foot with ill-timed new taxes such as those that Germany is currently contemplating.”
To be clear, I rather suspect Rogoff thinks Europe should also implement some supply-side reforms. But he didn't tie the case for those reforms to global rebalancing.
Second, Rogoff recognizes that the big current account surplus is now found in the world’s oil states. And he consequently calls on the oil states to do more to support global demand growth.
It seems the Saudis are now spending at rate more consistent with $35 a barrel oil than $25 a barrel oil. See Brad Bourland of SAMBA. That is a good thing – but there is still a bit of a gap between $35 and $70. And some other countries haven’t been as willing to spend as the Saudis.
The one thing Rogoff left out: the need for more exchange rate flexibility in the Gulf. There is no reason why oil exporters should peg their currency to the US dollar – or for that matter the currency of any other oil importer with a large current account deficit. Forget about the Turkish lira. If the oil exporters want to peg, they should think about the Canadian dollar …
The net result: Rogoff’s list of policy prescription is far more up to date that the standard “US fiscal, Asian exchange rate flexibility and European structural reform” list. US fiscal and Asian exchange rate changes remain essential, of course. But Europe should get credit for supporting global demand for the past 18 months, and be encouraged to keep it up. And the oil surplus is now too large to be ignored.
Hopefully the G-7 and the IMF will take note.