The idea behind “fiscally-driven external rebalancing” is straightforward.
If countries with external (e.g. trade) surpluses run expansionary fiscal policies, they will raise their own level of demand and increase their imports. More expansionary fiscal policies would generally lead to tighter monetary policies, which also would raise the value of their currencies. And if countries with external (trade) deficits run tighter fiscal policy, they will restrain their own demand growth and thus limit imports. Firms in the countries with tighter fiscal policies and less demand will start to look to export to countries with looser fiscal policies and more demand.
This logic fits well with IMF orthodoxy: the IMF generally finds that fiscal policy has a significant impact on the external balance, unlike trade policy.*
But it often encounters opposition, as it implies that the fiscal policy that is right for one country can be wrong for another. Many Germans, for example, think they need to run fiscal surpluses to set a good example for their neighbors. Yet the logic of using fiscal policy to drive external trade adjustment runs in the opposite direction. To bring its trade surplus down, Germany would need to run a looser fiscal policy. The positive impact of such policies on demand in Germany (and other the surplus countries) would spillover to the global economy and allow countries with external deficits to tighten their fiscal policies without creating a broader shortfall of demand that slows growth.
So one implication of using fiscal policy to drive trade rebalancing is that there is no single fiscal policy target (or fiscal policy direction) that works for all countries. Budget balance for example isn’t always the right goal of national fiscal policy. Some countries need to run fiscal deficits to help bring their external surpluses down.
That idea certainly encounters resistance. And as practical matter, the IMF’s latest estimates show that Europe hasn’t used fiscal policy to help facilitate its own internal adjustment.**