Global Politics of Excess Savings in a Low-Rate World - The Case of the Eurozone

This paper investigates the distributional conflicts and beggar-thy-neighbor effects of running current account surpluses in a low-rate, weak demand environment (or liquidity trap) ‒ and how countries get away with it. It analyzes the Eurozone's surplus countries in the aftermath of the euro crisis, and how they managed to sustain uncooperative policy configurations detrimental to both their partners and global macroeconomic stability. It explores how the longstanding problem posed by the lack of surplus country adjustment is exacerbated by certain traits of the Eurozone, which make members of the currency area particularly successful in their refusal to rebalance. Historical analysis of macroeconomic negotiations and interviews with policy-makers are used to establish how Euro membership strengthened the bargaining power of individual countries in bilateral trade disputes. Firstly, sharing a currency with structurally weaker economies mitigates the equilibrating mechanism of exchange rate appreciation, which would otherwise constrain the current account surplus. Secondly, Euro members joining together in the world’s largest trading bloc can leverage their membership and avoid being strong-armed into policy concessions. Ultimately, in the absence of credible institutional or political incentives to force surplus country adjustment, negative real interest rates work as a penalty on excess savings.