Global Imbalances and Global Governance 

While global imbalances may not be bad the renewed build-up of what are generally considered to be unsustainable levels of imbalances is potentially destabilizing and reduces global welfare. Though the EU as a whole is not a major contributor to them, it have a very strong self-interest in working through mechanisms of global governance to tame these imbalances.

This is driven by 1) the dangers of getting caught in the cross fire between surplus and deficit countries 2) our stake in an optimal growth-enhancing solution at the global level 3) the fact that the international debate mirrors the ongoing Euro area imbalances 4) the possible lessons that we, as the European community, might have for better global governance.

Our new paper for the European Parliament highlights how old approaches to international governance are increasingly out of date in the day and age of increasing globalization. We now live in a world that is highly interconnected, is full of externalities and is increasingly fast paced. (Available for download in our publications section)

The ever faster and larger cross-border flows of commerce, people, and information technologies has reduced the idiosyncratic risks by allowing us access to an increasing array of options for example for investments or suppliers. At the same time, the higher degree of interconnectedness that this has brought about means that the risk of system wide failure – the dominoes all falling together - has increased significantly as demonstrated by the recent world wide collapse in cross border finance and trade.

Existing international governance structures to pursue shared global goals and manage externalities were designed at a time when systemic risk, externalities and the pace of change was much slower. These institutions and their approach to global governance now look increasingly out of touch. There is an urgent need to plug this governance gap that grows by the day.