One of the reasons leading to the global financial crisis is shown as global imbalance. The global imbalance is also referred to as the current imbalance. Current account deficit leads to global imbalances. Similarly, the current surplus is a global imbalance problem. The imbalances in the global distribution of goods and capital movements have become a serious economic problem over time. In some parts of the world, investment and production increase, while the other part deals with high debts and consumption.
The main reason for the current imbalances is the trade imbalance. Exchange rates, prices, and changes in domestic and international revenues can lead to the deterioration of the trade balance of a country. Similarly, the investment-saving imbalance in the country is another factor that leads to a current account deficit. The size of the country’s economy will cause the effects of the current imbalance to be felt more. In general, global competitiveness also influences the current account deficit of countries. The fact that countries try to keep their money at competitive levels to ensure economic growth can positively affect current balances, but may lead to the deterioration of the current balance of trading partners. The current account surplus also stems from either excessive savings or lower investment. Another explanation is the highly competitive exchange rates. Competitive exchange rates can encourage current account surplus and thus economic growth.
If the current deficit or surplus is sustainable, there is no problem. However, current account deficits that have not been sustained for a long time will cause the economy to deteriorate. Similarly, costs may be due to the fact that current surpluses are not used optimally. Having too much foreign currency and using risk management non-effectively will bring financial risks. Or non-efficient use of excess capital may lead to a decrease in production capacity and a decrease in growth rate.
So what can be done? One of the proposals on reducing global imbalances is the effective use of risk management. New technological developments offer many tools for the transfer and diversification of risks. Another suggestion is to take advantage of the change in the exchange rate. In particular, flexible exchange rate regimes provide significant protection against variable prices. Still more savings than the current deficit of the countries giving the issuer/countries purchase will help reduce the deficits. The increase in consumption will lead to a revival of demand on the market. Finally, as in the global financial crisis, it is also important for economies to establish a global cooperation on reducing global imbalances. The harmonization of market players will ensure strong policy steps by increasing global awareness.