Question

In Chapter 10 of International Economics, Carbaugh (2011) asks, "Can the United States continue to run current account deficits indefinitely?" (p. 361) Apply the same concepts to the EU’s balance of payments. At its current levels, is it sustainable in the long term? Does the United States' unique position in the world economy allow the country to safely run persistent external deficits? Can persistent U.S. deficits and payments accounts be adjusted without bringing about an economic recession or crisis?

Answer 1

Looking at current EU debt there is no guarantee that economy can run smoothly as it is inhibited by smaller nations like Greece and also has multiple nations with different economic circumstances and much lesser comparative advantage ljke US and Mediocre relations of some nations within EU can make persistent debt to cause recession sooner or later.

However for US the case is different because it is amongst most favored nation, has substantial backing of dollar as reserve currency, greater political control and excellent bilateral relationships making its persistent debt as sustainable because the debt is refinanced and at same time been capitalised as government spending for boosting economic real GDP.

Persistent US trade deficit can be sustained if it is backed up by expansionary monetary and fiscal policies and if trade is carried out with newer emerging nations to offset any deficit.