Europe needs to tighten monetary policy to avoid bubble

The EU’s large external surplus, in light of falls elsewhere, risks a return to conditions behind the crash, says Michael Heise.

WITH global rebalancing set to be high on the agenda at the next G7 and G20 meetings, Germany — with its persistent export surplus — will again come under pressure to boost domestic demand and household consumption. But the German consumer is a sideshow. What is needed is an investment surge in Germany and Europe, and a co-ordinated exit from ultra-loose monetary policies.

Massive external-account imbalances were a major factor behind the global financial and economic crisis that erupted in 2008, as well as in the eurozone instability that followed. Now the world economy is in the process of rebalancing — but not in a way that many people had expected.