Brad Setser

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Europe, engine of global demand growth …

by Brad Setser
April 10, 2008

If I had too pick two stylized facts about the global economy that I thought were under-appreciated, the first would be the enormous increase in emerging market reserves.

The IMF’s WEO data (remember, I like to start by looking at the IMF’s numbers, not its words) indicates that the emerging world added $1236 billion to their reserves.   Throw in another $149b in official outflows (think sovereign wealth funds) for $1385b increase in the government assets of the emerging world.   That total includes some valuation gains, but it excludes the increase in the government assets of the Asian NIEs (Hong Kong, Korea, Singapore, Taiwan), the increase in the foreign assets of China’s state banks and the increase in Japan’s reserves.    Back in 2001 and 2002, the increase in the foreign assets of the emerging world was in the $125-200b range.

Emerging market governments now drive the global flow of funds – and allow the US to sustain a large deficit even as private demand for US assets (relative to US demand for foreign assets) has collapsed. But, as Steve Waldman has pointed out, this rise in official flows has been the core theme of this blog – so it shouldn’t be news.

The second fact is the extent to which Europe – yes, not-so-sclerotic Europe – has replaced the US as the engine of global demand growth.

By demand growth, I mean demand growth in excess of supply growth.   That disqualifies China, as Chinese supply has grown faster than demand.   Not so for Europe as a whole, or at least the countries that are part of the European Union (i.e. Norway is not counted).     Between 2005 and 2007, the IMF estimates the United States balance of payments deficit shrank by $16b, while Europe’s expanded by $170b.

As a result, a rise in Europe’s deficit not a rise in the US deficit is offsetting the rise in the emerging world’s rising surplus.

Consider the following graph, which shows the US external deficit, the aggregate external deficit of the European Union and the aggregate surplus of the emerging world (plus the Asian NIEs).   I have inverted the sign of the US and EU deficit – a bigger deficit is consequently a bigger positive number.


That is a change from the 2002-2005 period – when a $295b rise in the US deficit balanced most of the $382b rise in the emerging world’s surplus.   It also implies that if the “rich advanced economies” are looked at as a whole, there has been less adjustment than might be expected.    The overall deficit of Europe and the US continues to rise – which has allowed an ongoing rise in the overall surplus of the emerging world.    In that sense, the world hasn’t adjusted.


The IMF forecasts the recent trend will continue in 2008 – with the US deficit falling by $124b (even with oil at $92b) and Europe’s deficit rising by $92b.   Today’s trade data suggest that may be a tad optimistic.   The nominal trade deficit for q1 could be larger than the nominal deficit in q4.

If the US oil import bill remains at its current level, the US petroleum deficit (imports net of exports) would deteriorate by about $110b.    Consequently, the US non-oil deficit would need to fall by $235b or so to bring the US deficit down to the level the IMF forecast.   That is possible – though only if non-oil imports don’t continue to jump up expectedly (as they did in February; non-oil goods imports were $140.8b – well above their levels last fall).     The fall in US interest rates should help the US income balance, but bringing the overall deficit down as quickly as the IMF forecast requires a bigger change in the trade balance than has appeared in the data so far this year.  (more follows)

One other small point about the trade data.

US exports to China so far this year are up 29.3%.  US imports from China are up only 3.2%.    The combination of RMB appreciation and the US slowdown has put a dent in the US deficit with China.    Exchange rates do matter.   China is – no surprise – increasingly relying on European demand to power its export machine.

But rates of change sometimes can be a bit deceptive.    In dollar terms, US January and February exports to China are up $2.6b (over a year ago) while US imports are up $1.6b.   30% growth in exports and 3% growth in US imports – given the huge difference in the size of US exports and US imports – only translated into a $1 billion improvement in the January-February US trade deficit with China.

Every little bit though helps.   At the least the US deficit with China is now falling.


  • Posted by bsetser

    Comments were down due to a technical issue earlier in the day. The issue has been resolved. My apologies for any inconvenience.

  • Posted by Guest

    U.S. Sanctions Send Iran Into the Arms of Asia

  • Posted by DC

    The US deficit with China would fall even more if civilian high-technology export restrictions were removed. No one is advocating that the US sell military hardware to China, however the US Economy loses hundreds of billions from restrictions on security products, semiconductor gear, GPS chips, helicopters, commercial satellites, supercomputers, etc. Sure some high-tech products may have dual usage, but don’t the Chinese also have a legitimate use for supercomputers in weather forecasting, advanced semiconductor gear for cell phone chips, commercial satellites for communications, security products for fighting terrorism, or GPS chips for tracking railway cars. For every Boeing 777 Aircraft sold to China, a high-tech export waver is legally required for the US President to sign. And how much danger is there really from technology exploitation of a satellite 22,000 km in orbit. As the US is a very high labor cost nation, when the US government severely restricts most high-value exports to China, it is lose-lose both the United States and Chinese economies. Oh never mind, the US foreign policy establishment will never disgard its neo-conservative agenda for US global hegemony over the entire planet.

  • Posted by Guest

    Lets hear it for Indonesia…

    "Indonesian central bank chief arrested"

    Hang ’em. Hang ’em High.

    …start of a world wide trend.!?

  • Posted by Guest

    Increasing trade deficits in the US are very closely correlated with the decline in value added jobs and wages for most people in the US that is camouflaged only by them going deeper into debt to maintain their standard of living. This is reflected in the housing collapse. North Korea has been isolated politically with no access to credit and needs hard currency and a trade surplus for survival purposes.

  • Posted by Guest

    If I remember correctly, the role of the Federal Reserve is “price stability”. Take a look around. Do you see anything stable about prices?

    The Fed should be fired. They failed miserably.

    But…a country that gives so much power to one man, as this country gave to Greenie, deserves what they get. This country is just dumb. Dumb dumb dumb.

    The USA is getting their Darwin award each and every day, and it is WELL deserved. This country was doomed when Europe starting throwing out their trash and they all ended up here.

  • Posted by Guest

    Risky Geopolitical Game: Washington Plays ‘Tibet Roulette’ with China

    In short, US State Department and US intelligence community finger prints are all over the upsurge around the Free Tibet movement and the anti-Han Chinese attacks of March. The prime interest of Tibet for Washington today is its potential to act as a lever to destabilize and blackmail the Beijing Government.

  • Posted by bsetser

    on topic comments please; this was a post about Europe’s balance of payments and the latest us trade data.

  • Posted by FG

    I guess there are large differences within Europe.

    One question is: how long will Europe keep growing at the current pace?

    Several housing markets there look on the brink of following the US.

    And inflation (food, energy) is eroding purchasing power in spite of a strong euro.

  • Posted by Anonymous

    What? All that socialism and Europe is actually doing better than the US?

    Brad, I’d be curious about what countries are running significant deficits. Without delving into the IMF report, I would bet that Britain and Italy are the culprits and that most of Europe is pretty well in balance.

  • Posted by Anonymous

    Ah, yes. Table A.11 in the report. Spain, Greece, Portugal, Ireland, Slovenia, Malta, and France are also grasshoppers. But of those, most of the economies are too small to be major contributors to the Eurozone deficit. But the point stands.

  • Posted by AFFG

    Most of the deficits are in East Europe. These countries are running deficits due to massive investments. BUT one has to say, that these deficits are mostly due to too loose monetary policy. This shoe will drop … eventually.

    I believe one of the reasons why Mr. Trichet is not cutting rates, is because he want´s to make sure we do not enter the path of the US and expects things to ease when the Asian currencies appreciate substantially against the Euro (which they are doing).

    Can somebody tell me what caused the trade balance of the US to deteriorate like that, it doesn´t seem to be oil … ??

  • Posted by globumedes



    A. somewhat off topic

    1. Make this distinction for each country:

    a. production for global markets: are doing excellent; people get job, income,..

    b. production for domestic markets: are invalid, people get mini-wage jobs ore no job, ..

    2. For Mercedes (for example) it doesn’t matter much, if the domestic (Germany) demand has shrunken; because it gets much more demand from the global markets: so the total sell-volume is stronger than before the globalisation

    3. So we see in each country a divided economy/society:

    -a well running part and a hunger part;

    -a part that has membership to growth, stress and wealth, and the part, that goes the way of empty pockets

    (the empty pockets part will increase: the more modern the factories are, the less people produce more goods for the markets)

    4. This fact makes the difference between the old and the new (global) economy; and makes it harder for the spectators and the speculators, to understand the domestic/global markets for the spectators and the speculators.

    B. Europe (old) the engine

    a. The negative trade-balances for Europe countries, where one part of the societies have all the advantages and the other part has to bear the disadvantages of the trade gap (no job, no insurance, no pensions, bad houses and livings, no second teeth and do it yourselves medicine, ..) is probably not acceptable for Europe (old) citizens in the long run; (trade-unions are still alive).

    I believe, the more consensus oriented Europe countries can not take it for long times, to have much divided societies

    b. So the mounting trade gap is a question of the domestic balances of the societies: protectionism-growth will become a traktandum. And lower wages too!

    C. What US/EU economy has to sell in high volume in the long run, what CN and India will not produce by themselves?

    The fiction of all the stuff, that will come from research and development will not save US/EU in a way, that the broad mass of the citizens will have an acceptable living-standard.

    (besides: this highly sophisticated stuff will be produced in almost people-empty factories; and from the patents only a very small part has profits)


  • Posted by qingdao

    The Economist describes the Ukraine much like China; any thoughts on how the Ukraine will evolve? Also: K. Rogoff states: "The yuan may well supplant the dollar in the second half of this century;" Project Syndicate) Given China’s demographics, environmental degradation and pending "adjustment" I think that’s about as likely as the hryvnia replacing the dollar.

  • Posted by mheck82


    What can CN, India produce for us, what we can’t produce for ourselves? Specialisation improves productivity, so it will not make sense for CN/India to produce everything on their own, unless they have an explicit goal to be independent of others. Permanent surpluses don’t make sense at all. But temporarily mercantilism was an option as well for France in the 18th, US and Germany 18th, 19th, and Japan and Korea in the 20th century without impoverish UK in the 19th century or the west in the 20th. So we see now China using the very same strategy in the 21th century. All the countries have made significant contributions to the knowledge and technical progress of humanity during their catch up process, which they have shared nearly freely with the others. Let the thousends of millions people in CN/India do their part in this century.

  • Posted by Guest

    I believe these posters should read a essay by Henry Liu posted on the Asian Times.

    Mr. Liu posted this essay on January 11 2006 and is dated as to the events occurring 15 months ago, however his writings on future events are becoming a reality. The essay is lengthly, and I suggest to study it a couple or three times.

    The end game will be ugly.

    Will we be OK…Not a chance.

  • Posted by DC

    Anglo-American Intelligence Agencies dupe Tibetian activists to target Beijing Olympics

    Around the world, Beijing’s hosting of the 2008 Olympic Games has become the target of unprecedented, well-orchestrated and extremely hostile mass protests. Through propaganda, China is being made into the single arch-villain.

    Meanwhile, geostrategic realities, and historical and current parapolitical fact, suggest that the protesters and passionate activists have once again become the willing dupes, propaganda shills, and street bullies for “causes” created, fronted, and pushed by Anglo-American intelligence agencies (CIA, British intelligence, etc.) that continue to target a government (this time Beijing), in a host of long-term subversion and sabotage plans. Behind the powerful din created by the popular and celebrity-embraced “Save Tibet,” campaign is the fact that the CIA is behind financing the Tibet independence movement.

    Far from actually alleviating any suffering in Darfur, Tibet or within China itself, activists are being guided into deepening the suffering; assisting the Anglo-American empire’s own plans to destabilize and conquer (energy-rich and strategically situated) Africa and (energy-rich and strategically situated) Tibet, and politically hamper Beijing.

  • Posted by Mace


    What does Tibet have to do with this topic?

    Why do you keep posting off topic?

    Why don’t you just leave this site?

  • Posted by bsetser

    DC no need to leave the site but there is a need to keep comments on topic.

    all – there were some difficulties with the comments again last night, so if you had trouble posting, my apologies. the problem is fixed. i understand the frustration — i lost a couple of comments myself. RGE is upgrading its blogging platform, hence the transitional issues.

  • Posted by S


    The solution to the problem is not more of what got us here in the first place. Nor has giving away the family jewels enruiched a nation. Kind of like devaluing your way to prosperity.

    In the meantime we will continue to run through the political laundry list using every iota of economic dogma to continue horizon pushing – if only Tanzania would open their market – alas we would all be better off. Free trade is a political proposition.

    The solution is to inject some reason into policy that reflects the interests of the USA, impossible to fathom I know. Say this in a policy debate and you are shouted down asunameican. hardly. It will take a patriot to stand up and halt the bankrupting race to the bottom. Not optimistic.

  • Posted by mheck82

    I doubt that Europe will make this ‘consumer of the last resort’ game very long. It would be interesting, if the savings rate in Europe is dropping, but in Germany the savings rate lately went up. But otherwise there would have to be a European investment boom.

    Italy, Greece, Portugal are already rather strongly publicly indebted. Spain, UK and Ireland had already an RE boom. Is the money inflow public bond purchasing? Questions over questions…

  • Posted by DC

    Let me state for the record, similar to the former Soviet Union, the US is increasingly intellectually bankrupt in all the economic, political, and cultural spheres. Instead building the US Economy through sound monetary and industrial policies, the foreign policy elites in Washington are delusional about expanding US global hegemony with military dominance over Russia and China. An expanded NATO is envisioned to deploy across Central Asia along the borders of China and Darfur Sudan for the control of the world’s strategic energy resources. Hopefully, the Europeans are well aware that the era of Neo-colonialism is over, and they should tell Washington that they won’t participate in any more hairbrained schemes including the conquest of Iraq oil reserves that are the world’s second largest. And contrary to the claims of the mainstream US media, there is no moral equilvalence between the situation in Iraq and Tibet. It is flat out disinformation lie by CNN and other mainstream US media that the demonized Chinese are conducting mass genocide in Tibet, Burma, Sudan, or anywhere else in the world. NATO was never envisioned to be a military force of US global expansionism into Central Asia, Africa, or the Asian Pacific. The Europeans should immediately dissolve NATO to thwart the global conquest agenda of the Neo-con US foreign policy elite.

    Risky Geopolitical Game: Washington Plays ‘Tibet Roulette’ with China by F. William Engdahl

    April 10, 2008

  • Posted by globumedes

    Hallo mheck82

    A. “What can CN, India produce for us, what we can’t produce for ourselves?”

    Nothing. Except:

    – in middle-term: some highly sophisticated products:

    – in long-term: some products of almost-genies (example: Th. Hänsch’s "frequency comb synthesiser";

    (and except maybe bamboos?)

    But they will produce all the rest now and the more sophisticated products tomorrow; because they can it, will it and do it:

    – much more deeper cost, wages, social security, environment-problems, ..;

    – how many 100’000’s of engineers leave all year the universities;

    – (ff) assiduous, capitalismus oriented and apparently more patriotic than US-‘citizens’ young humans.

    And they can do it for a very long (10/15y?) time; depends on a lot of things: for example: what kind of unemployment/poverty is the US/EU prepared to bear?)

    B. “Specialisation improves productivity, ..”

    I think, CN-capitalismo-burocratico-militario-politico Elitemen are pragmatic men (as the Indian-leaders), the old history/experience will show some signs, minimally.

    That means: everything that is, for them it is just a tool -in the hands of the winner; that means: DOGMAS of any economy-‘theory’ (and specially when it comes from the West)are just a tool, as is also any religion ore other ideology ore illusions-fantastico-politico ore in general: other performances of the successors of the scholar of any Oracle of Delphi (

    In short: if the dogma of “comparative advantage” (Riccardo; has come to economic-theory during a period of illness; a not much discussed fact) will be adequate, then the CN-Elite will use it; if not, then not.

    I think: the Dogmas belong to tititainment (Brzezinski) for the Big Game.

    C. ff “…so it will not make sense for CN/India to produce everything on their own, unless they have an explicit goal to be independent of others.”

    The CN goal is, to organise work for 1.4 bn humans; food and stability/tititainment and ‘security’. The best tool will be what?

    (I belive CN will become big social problems: rich/poor, city/countryside; eventually ethnic problems (Moslem (Uygur, Kazakh,Kirghiz) , Tibet, Mongolian): ore

    These and other problems gives the CN-Elite enough drive, to not sleep, but produce the reality, that is as near to their goal as possible.

    I don’t believe, that CN want to be autarky/independent. See their export/import volumes. They know, that they are, what they are, because of the global environment: commodity import/US,EU,Rest for export; No Great Wall: otherwise they all will become farmers and have a life in bamboos-houses and look at the moon and goes the incredibly hard way: do it yourself. But this is completely unrealistic.

    Next it is evident, that the US/NATO, EU, RU, IN will use the divergent/separatist powers in CN, when they think, it would be nice.

    (But because the voices of the global citizens are in a condition of total deplorability, the story will take that way, that Luzy Homo (sorry, no better photograph ore

    invented (besides: before that time was the Era of Golden Time, the Fool’s Paradise. (this should be ironic – for the broken English speaking spectators.-))

    D. “…. But temporarily mercantilism was an option as well for France in the 18th, …..

    Yes. As I said: Everything is only (and nothing else) a tool of power in the power game of the different (national organised ore in fat companies) globally effective Super-Players. And Everything has its time and has not its time as a tool.

    A structure, that we see: different ‘attitudes towards the world’ in the following sense: vita passiva and vita activa:

    – as a pharmacist: you create a family, a company, your environment ..; for the rest you are passive, consumer (of physical and mental supply).

    – as a leader of a country (take CN), the active part is incredibly high: you create a lot of things, huge things. You can not consume given stuff, you have to create real stuff, have to design the actual and the future reality (bring in reality, fact): war/peace, development/standstill, … of millions and billions of people. (the question: this stuff, do they do under control of the society/citizen – or do they do this by their own feeling/good-thinking ore god-thinking, ore ..)

    These are two different games: it should be forbidden to believe, that the game of the Big Leaders has anything in common with the normal-human game; like Christoph Columbus: one went in unknown territory, the others stood at home.


  • Posted by Guest

    "Stop complaining! The people in charge went to Ivy League schools where they had lots of learnin’. The US universities are the best! So dont criticize their "creativity" or the "facilities". When you spend 50k/year for University, you too can just make your own reality!!!"

    Yeah well I’ve worked for a bunch of those clowns and guess what, it is always one of US state university guys from the real world who either ends up cleaning up their mess while they continue to collect a fat paycheck or we end up on unemployment as a result.

    Ivy League = Lots of silly stupid ideas about how to run the world.

  • Posted by Rainman

    Too much bitterness in this blog. Aren’t we like thru with nationalism and all kinds of "-isms"? C’mon, u can’t be serious if you talk about "state-nations" in 2008. Who cares anyway?

    Econ 101: no matter China & India are dropping 1 million engineers a month. These engineers like everyone else enter both the supply and demand functions in a market economy. They produce chips or whatever and will drink pepsi and catch a movie I don’t know. All that matters is that that complicated stuff they do is getting cheaper and the moronic pepsi more expensive in relative terms.

  • Posted by df

    betting on europe for global demand … You have to have nothing left… China s bound to give up soon. 600 Bil a year in reserves that ‘s too much. And europe is on the brink of recession anyway (with housing markets falling).

    So it s just a matter of months now till the crisis hits china. It ll pay dearly its mercantilist policies…

  • Posted by AFFG

    Europe´s savings rate is going to go up, as Spain and other inner deficit countries are going to stop overconsumption.

    The rest will continue saving … as usual.

    I have lost the believe the US is capable of saving … the dollar keeps falling and the deficit just widens. This will go in the history books as the conundrum of the late 20th century.

  • Posted by Judy Yeo

    At the least the US deficit with China is now falling.

    Brad, be careful what you wish for, in the "globalized"/interdependent world we live in, a slowdown in China might not just provide the relief the US is in need of but a sting in the tail in the recovery phase that the US would need to go through soon. For one, some investors may have a nasty surprise should they find the need to pull out of a slowing Chinese economy, it’s an economy that’s trickier to get out of than into. "Being too invested" might just be a new concept that investors have to learn, ditto for India.

  • Posted by df

    judy yeo I agree 100% I wonder how many investments in China will be profitable once the RMB has risen 40% relative the euro.

  • Posted by Jozo

    Dear Mr. Setser,

    I think that picture is distorted by your use of US dollars as measure of value. If you use Euro or better barrels of oil as y axis, you will observe interesting things. The EU increased imports, but in Euro not as much as in dollars.

    Also – your great Chinese reserves graphs, try to plot them in oil barrels or grain bushels, or even in Euro. The Chinese reserves in real purchasing power are not doing that great recently, isn’t it? The question is does China policymakers care and if yes what will they do?

    P.S. apologies for crude English.

  • Posted by Jozo

    Dear Mr. Setser,

    I think that picture is distorted by your use of US dollars as measure of value. If you use Euro or better barrels of oil as y axis, you will observe interesting things. The EU increased imports, but in Euro not as much as in dollars.

    Also – your great Chinese reserves graphs, try to plot them in oil barrels or grain bushels, or even in Euro. The Chinese reserves in real purchasing power are not doing that great recently, isn’t it? The question is: does China policymakers care and if yes, what will they do?

    P.S. apologies for crude English.

  • Posted by Jozo

    Apologies for double posting.