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Hélène Rey, you chaired the working group on global imbalances at the latest G7. Could you explain why, beyond the technical aspects, this is one of the keys to geopolitics at the crossroads with globalization?
Hélène ReyGlobal imbalances are current account imbalances. A country with a surplus lends to the rest of the world, while a deficit country borrows from abroad, for example to support consumption or imports. The United States is the typical example: for a long time, they have consumed more than they have produced and financed the gap by borrowing from abroad.
Someone has to lend in return, i.e., export the goods that the Americans consume. That is largely China. In 2025, according to customs data, it exported about 1.2 trillion dollars of goods, absorbed by the United States, Europe, and increasingly by emerging economies.
Europe occupies an intermediate position. Its small surplus, declining, reflects a savings rate slightly higher than investment. The imbalance is thus primarily between the United States and China, but Europe is not untouched by it.
Why should we worry about it?
Because history shows that large imbalances, as in 1985 or 2007, end in international tensions. When a country like China exports massively, it destabilizes the industrial capacity of the importing countries. When these exports are as disruptive as they are today, they fuel protectionism.
The other risk is financial. These trade flows have corresponding capital flows: we accumulate receivables, financing positions, sometimes with leverage. When the volumes are very high and it’s hard to know who finances what, instability becomes a threat. This is what happened in 2007-2008: enormous imbalances financed in part by Asia, a significant American deficit, then a major crisis. The same players are still around, and this kind of risk could re-emerge.
In 2007, however, Europe was not worried about its own surpluses. Isn’t there two weights and two measures in our analysis of Chinese development?
The China of course might rightly reproach us. And we must acknowledge that failing to anticipate the financial risk twenty years ago is not a success. In the early 2000s, the system relied too much on leverage, notably to finance the American housing market. Europe too had deficit countries in the midst of a real estate boom, such as Spain or Ireland, financed by the core zone economies.
The 2008 crisis, the fiercest since the 1930s, hit the United States and then Europe. These countries were forced to move into surplus at the cost of a painful macroeconomic adjustment; Greece, in a somewhat different case, underwent the same ordeal. The lesson from that period is that we must take these large imbalances very seriously.
What do you propose?
My central argument, developed in the report we presented to the G7, is that to correct these imbalances we must correct the macroeconomic policies that generate them.
In the United States, it is excessive fiscal spending in an economy where demand is already high. In China, it is an investment structure biased toward industry and exports, to the detriment of services. Chinese household consumption is squeezed: too much investment in manufacturing and in certain tech sectors, but not enough in services or toward consumption.
If these two models do not rebalance, and if Europe does not accelerate its productive investment and growth, imbalances will persist. We will accumulate financial vulnerabilities on one side, trade tensions on the other, both difficult to manage.
Pierre Wunsch, you mentioned a return to the “eurosclerosis” of the 1970s-1980s. Isn’t the diagnosis exaggerated?
Pierre WunschOur paper is built in two steps: repetition, then rupture. One could copy-paste passages from the Draghi report into 1970s or 1980s reports: it’s the same tale of a lagging Europe, overregulated, innovating and growing too little. For forty or fifty years, European debate repeats the same messages, always with the same answer: “more Europe” and big plans, without ever truly solving the problem.
Not everything has been negative. After the oil shocks, we made a clear choice: the single market, open trade, a strict competition policy and no industrial policy, because attempts to save old industries had been expensive and unsuccessful. A consensus formed, left and right, to leave matters to the markets. Trade policy was delegated to the Commission, which negotiated on behalf of the member states by applying the free-trade manual.
That worked reasonably well. In a rules-based world, Europe, whose decision-making is complex with 27 states, the Council, and the Parliament, was in its element. We excelled even to the point of exporting our standards to the rest of the world: the “Brussels effect.”
But we continued to miss waves of innovation. The Lisbon Strategy was supposed to make us the continent most innovative in the world; we are not. We are absent from the “Magnificent Seven,” and today, in AI and robotics, the United States and China are ahead, Europe at best third. The question is whether being third is so bad: that will depend on the structure of these markets and the diffusion or not of AI.
What has changed, then?
We are moving from a rules-based world to a transactional world. Every day brings a stream of decisions that fall outside any rule, while Europe remains at the opposite extreme: here, everything is governed by rules.
The choices that worked yesterday cannot be applied as they were. First, strategic autonomy now includes access to rare earths. Then, due to our climate rules: producing in a decarbonized way makes us noncompetitive in some sectors, notably heavy industry.
So we want to produce where we do not have a natural comparative advantage, which a pure market solution cannot enable. We must find an intermediate path, in a sense “half-encircled”: generally respect the rules, but have instruments for cases where we cannot do so, whether subsidies, industrial policy, or trade barriers. Trade must remain rules-based, with limits to industrial policy to prevent a European-wide currency of escalation, but we will sometimes need to deviate. The challenge is to reconcile forty years of rule-following with a U.S. president who, like Donald Trump, invents something new every day.
Should Europe adopt a European preference?
More than anything, we need to reopen the debate on the basis of arguments. The old balance no longer works, but we should not throw the baby out with the bathwater: intervention should remain exceptional and framed by clear rules. We must then assess the effectiveness of the tools. A preference for local production can be relevant in some sectors, but not necessarily in all. It is up to economists to compare the instruments on a case-by-case basis.
How should Europe deal with the United States?
To answer, I will take an example. Donald Trump travels to Scotland, sees wind turbines near his golf course, dislikes them and contemplates imposing tariffs for that reason. For us, turbines near a golf course have nothing to do with trade. For him, everything is connected to everything. Europe has always treated trade, defense, and the environment as separate domains. But when facing someone who plays all his cards and tells Zelensky “you don’t have the cards,” that approach no longer works.
We must find an intermediate path, in a sense “half-encircled”: generally respect the rules, but have instruments for the cases where we cannot do so.
Pierre Wunsch
We must break down these silos and build our own deck of cards by linking defense, trade, and environment, something we have done very little of so far. We must also define our geopolitical position between the United States and China, an exercise we have long avoided. Russia is waging war on Ukraine, we support Ukraine, and China supports Russia. In the past, these topics remained separate. Today, the question is whether we can ignore that a country that is supposed to respect our common rules is also the best ally of our worst enemy?
Does Europe have the instruments to respond?
Hélène ReyRegarding trade, I would advocate for an order more based on rules. We benefited from the multilateral order since World War II, and it is easy to break away from it when you are the biggest commercial actor.
But from the outset, the GATT and then the WTO rules acknowledged that complete free trade would never be politically sustainable. Sudden surges of imports can cause too much damage. That is why these rules provide clauses to respond to such surges.
There is antidumping, well known, and anti-subsidy measures, fairly narrow, which cover only a small portion of Chinese exports. There is especially the safeguard clause which, in the very spirit of GATT, allows tariffs or quotas in the face of a surge in imports that hurts the economy. It has become too cumbersome to implement and is used less and less.
Our report proposes to return to this original spirit and to facilitate its use. It temporary shields an economy while it adapts. It is also non-discriminatory, staying true to the most-favoured-nation principle, and applies to all imports of a sector, which makes it more politically palatable. Legally it remains heavy, and that is where improvements are needed.
The United States plays by a different game, but a substantial portion of global trade does not involve them. If the rest of the world coordinates, respects rules, and aligns with the GATT spirit without abandoning it, these tensions would be greatly reduced.
And in the face of economic coercion?
Hélène ReyThat’s the other side: the world where “I can compel you because you depend on me.” Europe must protect itself by identifying the choke points of the global economy, those key knots on which we depend. These include, for example, the dollar in the international financial system or rare earths and critical minerals needed for electrification, which are largely controlled by China.
It’s another form of defense: diversify your supplies with allies or produce yourself to prevent dependencies from forming in our value chains. This is what we are observing today, in the United States as well as in Europe.
There is no European consensus on China, and German industry still values access to the Chinese market, even if that is less and less the case. How to move forward?
Pierre WunschThat is precisely what makes these questions so complex, even when Europe already had some tools. For a long time, these topics simply were not discussed; we had grown accustomed to the system. It is time now to reconsider the use of these tools.
A Japanese journalist recently asked me whether Europe would exclude Japanese companies from its market in the name of its rules. The situation is not comparable. It is one thing to give yourself time in the face of competition from many countries; it is another to face a single very large country that does not respect the rules.
China is not a market economy and it has pursued an industrial policy aimed at dominating certain sectors. The first “Chinese shock” hit some countries, such as Portugal, much more than the rest of Europe. Today, China has an industrial policy for everything and does not hide it: it wants to be autonomous in all areas and to import nothing anymore.
We debate whether it manipulates its exchange rate, but Chinese data hide gaps. A country cannot have a comparative advantage in all sectors without heavily manipulating its currency. If China beat everyone everywhere, that would show up in the numbers; for now, that is not quite the case.
My position is therefore the following: build alliances and maintain free trade with partners that respect the rules, but China is a special case. We should not rush, because these choices will have consequences.
Is the renminbi thus heavily undervalued?
Hélène ReyYes, but one must understand why. China’s surplus is explained by the combination of policies pursued in Beijing. The export sector benefited from targeted support. At the same time, a massive real estate crisis sharply reduced household consumption, without compensating fiscal stimulus, particularly in services.
We have benefited from the multilateral order since World War II, and it is easy to break away from it when you are the biggest commercial actor.
Hélène Rey
In an economy that combines a vast export sector with very weak domestic consumption, the only possible balance is achieved through a heavily undervalued real exchange rate. Households bear the brunt: their consumption is not sustained, and the burst of the housing bubble permanently eroded their wealth.
Why doesn’t Beijing change tack?
Much of industrial policy is decided at the regional level, and local officials are urged to create their own champions, notably in the electric vehicle sector. Regional governments derive most of their revenues from taxing local industrial production. When a sector is declared a priority, each region tries to maximize its own production, then moves on to the next sector.
This mode of governance is hard to reform, just as any entrenched equilibrium is hard to shift in China, Europe, or the United States. The overproduction that results depresses the renminbi in real terms, less through the nominal exchange rate, which remains fairly stable, than through price deflation in production, as is the case in the auto sector. It won’t be enough to simply appreciate the currency: one must tackle the cause, namely the mix of policies.
Can this model endure?
Not indefinitely, and Beijing knows it. If exports stay high and imports stay low, demand outlets shrink, especially since exports weigh less and less in China’s economy. If the rest of the world becomes more protectionist, as is happening now, China will run into a wall. Add concerns about employment: the seeds of change exist, but it remains to be seen how and when.
The Commission is moving toward a more active industrial policy. Does the Union have the means?
Pierre WunschThat’s the budget problem. Without margin at the European level, industrial policy, once allowed, reverts to the national level. In the steel sector, for example, the Commission allowed member states to subsidize green investment. Result: Belgium contributes a small amount, Germany 700 million. There is a risk of fragmenting the single market, as states substitute for an Europe that has no means.
If the rest of the world becomes more protectionist, as is the case now, China will hit a wall.
Hélène Rey
To do this properly, one should combine trade tools with industrial tools, choosing the most effective sector by sector, and I doubt the current framework allows that. As long as the European budget remains at its current level, an industrial policy at the EU scale will remain very limited. We are forced to choose instruments compatible with the lack of financial resources, which are not necessarily the best. That is why we must also address the question of tariffs, without ruling them out from the outset.
Interest rates are rising on bond markets. Should we read this as a warning sign of a crisis?
I would say this uptick starts from a good news: a dynamic economy and a surge in investment. The question remains whether these investments will be profitable. After a long period of global savings glut, we abruptly moved to a shortage of savings, which strains public finances.
We agree on the ideal solution: that the United States and China rebalance their saving and investment. The real question is: what if they do not? Then instability will accumulate in a context of rising interest rates. I worry for countries, including in Europe, with large public deficits and no room to absorb a shock.
I also worry about the balance between the single market, climate ambition, and free trade. I fear that companies will close factories in Germany or Belgium to reopen them in the United States, the Middle East, or China for climate policy reasons, without actual reductions in global emissions. That would be a major problem, first for Germany, but arguably for Belgium as well.
Some business leaders told me they do not buy Chinese equipment, but that the pressure has become too strong: the products are of good quality and cost about a third of European prices. How can we explain to workers that they are losing their jobs to Chinese products while China supports Russia in its war against Ukraine and runs huge surpluses? In the long run, we will have no credible narrative and political consequences will be worrying. We share the ideal solution, but if it remains distant, the interim period will be politically very dangerous.
What are the drivers behind this rise in rates?
Hélène ReyThey are multiple. The boom in artificial intelligence is driving a strong investment demand, not only in the United States but also in economies like South Korea. On the short end, inflation remains persistent due to energy prices, and central banks had to respond, as in 2022.
On the borrower side, the world economy is borrowing a lot: hyperscale cloud providers are growing rapidly, and governments, starting with the United States, are borrowing massively. That can push rates higher. We do not yet see a marked displacement effect, but it must be monitored.
If capital flows toward the United States and AI yields relatively rapid productivity gains, that is not a problem: value will have been created. The danger would be reviving opaque financing schemes, as in 2007, which end up collapsing and triggering domino effects. That is the risk we must watch for.
In the face of Trump, Xi, and Putin, should Europe fund a jointly financed defense industry?
Pierre WunschIn principle, I can only agree. However, I have worked on defining common needs, from soldier helmets to other equipment, and moving to collective purchases across 27 countries seems too ambitious: it was already very difficult between France and Germany. I am wary also of the idea of trying for five years to see what happens, because in some industries the damage can occur quickly. My caution also stems from a trade policy that has been perceived as having protected the losers of globalization too little.
Could common borrowing thus be a solution?
Not by itself. Without structural reforms, borrowing solves nothing. We must seek new financing instruments rather than simply transposing national tools to the European scale. I would not rule out, for example, the introduction of modest tariffs, which would provide some protection and resources to fund these policies. The more industrial policy and competition policy are organized at the European level, the better; otherwise we will revert to a system of national champions.
How can we explain to workers that they lose their jobs to Chinese products while China supports Russia in its war against Ukraine and runs colossal surpluses?
Pierre Wunsch
Hélène ReyLast year, with several colleagues, we proposed that a coalition of countries borrow collectively to finance catch-up in areas such as air defense, cloud military capabilities, or quantum technology. These technologies make sense on a European scale: what is the point of having a satellite in Germany and another in France? They benefit from economies of scale and are often dual-use.
The collective borrowing would finance the catch-up phase for about ten years. Then, a structural financing, via debt or an European tax, would take over to meet more modest needs once the initial debt is repaid.
Where does the dialogue stand within the G7?
Our first task was to establish a common diagnosis, which was not obvious. Some saw these imbalances as a matter of currency manipulation, while others saw it as an industrial policy issue. After many exchanges, a more shared diagnosis emerged: it is the combinations of macroeconomic policies that explain their persistence. On the responses, returning to the spirit of the rules and giving more room to these instruments has, I believe, partly inspired what is being done today. We will not claim credit for it, but we contributed, and 2026 should bring new advances.
Would a common debt strengthen the euro’s international role?
I believe so. Issuing common debt creates a safe asset, which can contribute to the internationalization of the euro. Many other conditions come into play, notably the depth of markets, but there is real interest in pursuing these questions and several initiatives are underway. It will also be necessary to ensure level playing field in terms of regulation, for both banks and non-banking actors.
Has the risk shifted to non-bank financial institutions, less regulated than banks?
The symptoms remain similar. When imbalances are large, risk hides somewhere in the financial sector: in banks, in bond markets, or elsewhere. They must be monitored to detect where a price correction could become systemic and affect citizens.
If an asset priced on markets corrects and losses are borne by investors without harming the rest of the economy, the scenario is manageable. By contrast, if non-bank actors are intertwined with banks and a trouble in their sector spreads to the banking system, we could face a situation close to 2007-2008 with very serious consequences.
That is precisely what we aim to monitor. It is not simple, because we have far fewer data on the non-bank sector than on banks: this is one of our main statistical gaps.