As more governments in Europe follow Greece and opt for austerity to deal with the fiscal and current account deficits they are faced with, the differences in economic performance within the Eurozone have been brought into focus. This necessitates rethinking the question of global imbalances and their implications for the world economy.

Till recently the discussion on global imbalances has focused on the current account deficit of the US and the current account surplus of China, making this a bilateral rather than a multilateral problem. As a result the process of rebalancing is seen as involving adjustments in either or both of these countries, and not so much elsewhere in the world. In the case of China, policy recommendations include an appreciation of its currency or an expansion of domestic consumption to reduce the excess of savings over investment. In the case of the US suggestions such as a limited but gradual devaluation of the dollar and curtailment of government spending after the crisis is put behind are commonly heard.

Among the many issues that such an argument ignores, is the fact that the symptoms of imbalance are more widely distributed than assumed here. This fact tends to be ignored because of the high share of the US in global deficits. Consider, for example the 163 countries for which current account balance data is available for 2007 in the International Monetary Fund's database. There were far more deficit countries (108) in this set, than surplus countries (55). Yet, the US, with the highest current account deficit, accounted for half of the total deficit of all deficit countries. Spain, which followed the US, contributed just 9.9 per cent of the total deficit. The top five deficit countries (United States, Spain, United Kingdom, Australia and Italy) accounted for 73 per cent of the total deficit of the sample countries.

Compare this with the distribution of surpluses earned by a much smaller set of 55 countries. China which has the largest surplus on its current account, contributes 22 per cent of the total surpluses of these countries, which is much smaller than the 50 per cent of the aggregate deficit notched up by the US. Further, Germany, which followed China in terms of the size of its current account surplus, contributed 15.8 per cent of the total surplus of these countries, making the distance between the two much smaller than that between the top two deficit countries. Finally, as we move down the league table for the top 5 surplus earners (China, Germany, Japan, Saudi Arabia and the Russian Federation), their combined share moves up to 61 per cent, which is not as far short of the 73 per cent contributed by the top five deficit earners. The degree of concentration of deficits is substantially more than the concentration of surpluses.

Thus, if the adjustment to ensure global rebalancing has to be undertaken by the surplus earners, then more than one country will have to be involved, and an excessive emphasis on just China's currency "undervaluation" or high savings rate may not offer the appropriate set of solutions. This is not to suggest that China should not aim to rebalance its domestic economy by reducing the savings rate and increasing the share of consumption in GDP or by reducing the role of exports and expanding the role of domestic demand in driving growth. It is merely to point to the fact that rebalancing is a more generalized requirement than emerges from the controversy surrounding the China-US relationship.

Consider, for example, Europe after integration. Germany, with its rapid rates of innovation and technical progress and reserves of relatively cheaper labour garnered through the process of unification, has been able to flood Eurozone markets with its exports. As a result, many European countries have been increasingly relying on construction and services to sustain growth, since, being a part of the Eurozone, they cannot face German competition by making their exports cheaper and imports more expensive through a devaluation of their currencies. For some of these countries, ensuring growth has often required undertaking large public expenditures that are not easily funded with tax revenues given the absence of adequate sources of revenue in the sectors producing goods. Deficits on the budget and the current account are therefore the norm.

In sum, uneven development among countries that are members of the European common market is responsible for a situation where there is a substantial degree of regional imbalance. Germany accumulates surpluses, while "backward" members of the Eurozone accumulate deficits. Yet nobody talks of Germany resorting to rebalancing adjustments, other than exporting capital and providing financial support to European countries facing economic difficulties. The problem obviously is not the undervaluation of the German currency, but the inability of countries that are members of the Eurozone to devalue their currencies in order to remain competitive vis-à-vis German exports. Rebalancing here requires restoring growth dynamism in the European periphery. If this is to be done without German help, it may require exit from the Euro and a greater focus on building capacities to cater to the domestic market. Opting instead for austerity, as Greece, Spain and Portugal are threatening to do, would only worsen the problem of the fiscal deficit and undermine the ability of these countries to restore their competitiveness in the medium and long term.