Global imbalances are back, and the lesson from history is that they often end in financial crises. This column, based on the authors’ chapter in the 4th Paris Report from CEPR and Bruegel, argues that global imbalances today are not just a macroeconomic issue; they are embedded in a broader context of financial fragility and geopolitical competition. Managing them in the current environment is less about achieving first-best adjustment and more about avoiding second-best policy mistakes.
Global imbalances are back. Since 2018, the sum of current account surpluses and deficits has increased by roughly 25% and 35% respectively, reaching their highest levels since 2012 (Figure 1). While still below the peaks of the mid-2000s, this renewed widening has returned the issue to the centre of policy debates, including at the G7, at the IMF (Elysée 2026, Bai et al. 2026, IMF 2025, IMF 2026), and of course at CEPR and Bruegel, in the form of our joint 2026 Paris Report (Rey et al. 2026). This column is based on the Chapter 1 of that report (see also Weder di Mauro and Zettelmeyer 2026).
The lesson from history is that global imbalances often end in financial crises. That risk cannot be dismissed today. The stock of external liabilities of the central country in the global financial system is already high and projected to rise further. Meanwhile, asset managers hold increasingly concentrated exposures, equity valuations are stretched and signs of investor nervousness are emerging, with greater efforts to hedge risk.
At a conceptual level, current account imbalances are neither unusual nor inherently harmful. They reflect differences between domestic saving and investment. Countries with deficits import capital to finance investment or consumption; those with surpluses export capital. In fast-growing economies, deficits can be welfare-enhancing, allowing investment to exceed domestic saving.
Problems arise when imbalances become large, persistent, and associated with rising leverage or distorted domestic policies. Deficit countries face the risk of sudden stops, currency depreciation, and debt crises. Surplus countries, while less exposed to financial crises, can contribute to global demand imbalances and political tensions. Crucially, adjustment requires addressing underlying macroeconomic conditions – trade measures alone are insufficient.
Today’s imbalances resemble those of the 2000s in their geography. The US runs the largest deficit, while surpluses are concentrated in China, Europe, Japan, and oil exporters. But the underlying system has changed in ways that increase fragility.
First, financial stability risks have increased. The US, as the issuer of the dominant reserve currency, is running large and persistent deficits financed by increasingly fragile private capital flows. The resulting configuration – high external liabilities, compressed risk premia, and leveraged financial intermediation – raises the risk of abrupt adjustment.
Second, political and trade tensions have intensified. External imbalances are increasingly linked to concerns about competitiveness, industrial policy, and strategic dependence. This raises the risk of protectionism and fragmentation of the global trading system.
Figure 1 External imbalances 2000-2024 (% of world GDP)
a) Current account surpluses and deficits
b) Net international investment position
The first-best solution for global imbalances is well known: US fiscal consolidation would reduce its reliance on foreign capital and narrow its current account deficit. China would rebalance away from investment- and export-led growth by strengthening social safety nets and boosting household consumption. Europe would increase investment, particularly in infrastructure, defence, and the green transition, thereby lowering its surplus. Such a combination would not eliminate financial vulnerabilities – given large gross positions, high leverage, and compressed risk premia – but it would reduce the flow imbalances that contribute to them.
However, policy trajectories are moving in the opposite direction. In the US, fiscal deficits remain exceptionally large despite strong growth, and policy is geared toward further demand expansion. In China, weak domestic demand combined with industrial policy has reinforced export growth and external surpluses. And in Europe, structural and political constraints continue to limit the scale and speed of investment increases. In this context, global adjustment is more likely to be asymmetric, delayed, and potentially disorderly.
The most immediate concern for the rest of the world arises from the US external position. A continued combination of large fiscal deficits and strong domestic demand implies sustained current account deficits in the range of 3.5–4% of GDP (IMF 2026b), financed increasingly through private capital flows. This creates vulnerability to shifts in investor sentiment. Two broad scenarios can be distinguished.
In a benign adjustment scenario, asset prices would decline gradually, risk premia would rise, and the dollar would depreciate – as it already has by around 6–7% in real effective terms since early 2025. This would help reduce external imbalances through both trade and valuation effects.
In a crisis scenario, adjustment could be abrupt. Triggers could include concerns about fiscal sustainability, a large correction in equity markets, or stress in less regulated segments of the financial system, such as private credit. The key uncertainty is whether such a crisis would resemble past episodes – characterised by a flight into US safe assets – or instead take the form of a ‘sudden stop’ on the US itself, with capital flowing out of dollar assets including treasury bonds.
The distinction is critical. Historically, even crises originating in the US have led to dollar appreciation, providing an insurance effect for the rest of the world. But a crisis driven by doubts about US fiscal or institutional credibility could reverse this pattern, leading to a simultaneous decline in the dollar and US asset prices.
A second uncertainty concerns policy cooperation. The global response to the 2008–09 crisis relied heavily on coordinated fiscal stimulus and Federal Reserve swap lines that supplied dollar liquidity to foreign central banks. There is no guarantee that such cooperation would be forthcoming in future crises.
Lack of cooperation could take several forms, including the discontinuing of central bank swap lines, and – in an extreme scenario – capital controls. The former might not matter in the event of a flight out of the dollar but would contribute to a liquidity crunch if the crisis takes the familiar form of a flight into safe US assets. The latter would matter particularly if the crisis takes the form of a sudden stop on the US.
The interaction of these two uncertainties – capital flow dynamics and policy cooperation – hence yields a range of possible outcomes, from manageable to highly disruptive. In the worst case, a loss of confidence in US assets combined with restricted access to dollar liquidity could generate both a global wealth shock and a liquidity crisis.
For the rest of the world, this implies a need for precautionary policies. These include building dollar liquidity buffers, strengthening financial system resilience through stress testing, and enhancing international cooperation mechanisms that do not rely exclusively on the US. Central banks and international institutions, including the IMF and BIS, have a central role in preparing for such scenarios.
The implications of a failure by China to rebalance are of a different nature. They are less about financial instability and more about persistent trade and structural pressures.
China’s current account surplus rose from 1.4% of GDP in 2023 to an estimated 3.3% in 2025 (IMF 2026c), driven by weak domestic demand and strong export growth. The underlying causes include a housing downturn, high savings, and policy measures that sustain industrial production and export capacity.
Even if China eventually rebalances, this process is likely to be slow. Demand recovery following the property downturn will take time, and the reduction of excess capacity – referred to domestically as ‘involution’ – will require firm exit and restructuring. Meanwhile, China’s industrial capabilities continue to expand, and its exports are increasingly similar to those of advanced economies.
For the rest of the world, this implies prolonged exposure to Chinese overcapacity and import competition, particularly in manufacturing. The consequences differ across countries.
For advanced manufacturing exporters such as Germany, the challenge is acute: a significant share of manufacturing value added is now directly threatened by Chinese competition (Grjebine et al. 2026). For developing countries, the picture is more mixed. Chinese exports make export-led industrialisation more difficult, but access to cheap capital goods can support domestic investment and growth.
Over the longer term, China’s continued rise implies a structural shift in the global economy. Even with rebalancing, China is likely to remain the dominant global exporter of manufactured goods, including high-tech products.
Faced with these challenges, the rest of the world should pursue interrelated objectives: mitigating the short-term impact of Chinese import surge, facilitating long-term structural transformation, and preserving the rules-based trading system.
These objectives create trade-offs. Policies that protect domestic industries can undermine incentives to innovate and delay necessary adjustment. Conversely, rapid structural change can impose significant social costs and political pressures. This generates a case for temporary and targeted protection. If Chinese export surges are transitory – linked, for example, to cyclical weakness in domestic demand – this justifies measures that prevent the destruction of otherwise viable industries. However, such measures must be explicitly temporary and designed to facilitate adjustment rather than preserve declining sectors.
Furthermore, these measures not sufficient. Protection can create breathing space for orderly adaptation to China’s rise as a dominant industrial exporter, but it does not replace the need for such adaptation. Industrial countries must focus on structural policies that support such adaptation, including investments in skills, infrastructure, and innovation, as well as reforms that improve the functioning of product and capital markets. Such ‘no-regret’ policies enhance both the resilience of existing industries and the emergence of new ones.
Equally important is the need to manage the social costs of structural change. Labour mobility, retraining, and income support mechanisms are essential to ensure that adjustment is politically and socially sustainable. Historical experience, such as the restructuring of the Swiss watch industry in the 1970s, shows that large sectoral shocks can be absorbed without long-term damage if adjustment mechanisms are effective.
Finally, policies must remain consistent with the preservation of rules-based trade. This constraint is critical. If major economies respond to Chinese competition with broad-based protectionism or discriminatory measures, the multilateral trading system risks fragmentation. Given the central role of trade in both advanced and developing economies’ growth strategies, such an outcome would be highly costly.
Managing global imbalances in the current environment is thus less about achieving first-best adjustment and more about avoiding second-best policy mistakes.
In short, global imbalances today are not just a macroeconomic issue. They are embedded in a broader context of financial fragility and geopolitical competition. This combination makes them more consequential – and more difficult to address—than in the past.
Source : VOXeu
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