I remember from before and after the fall of the Berlin Wall: Before the fall, West Germany ran a current account surplus. This was derided as an imbalance, and West Germany was urged to consume more. I suppose that meant that the deficit countries could have appreciated. To what real benefit of the current account deficit countries I do not know. After the fall, Germany borrowed heavily to finance reconstruction in, and transfers to, the East. The current account surplus disappeared, and briefly went into deficit. Because repayment was credible, there was upward pressure on the Deutsche Mark. This was derided as an imbalance, too.
Fixed rates, flex rates, single currency, the underlying real phenomena are the same.
I now know the solution: Prohibit international capital flows!
Another factor that I think should not be underestimated is the intended audience, whose comprehension of basic economics is quite likely close to zero.
In my experience, when it comes to "professional" discussion and commentary on economics, >95% percent is meaningless drivel. People talk a lot, yet say very little. Everyone thinks they and everyone else sounds smart, but no one really has a clue. It is basically a rather bizarre performative ritual.
Excellent scholarly and intuitive points. Two comments. First, the report gives another endorsement of the Draghi Report, published only 21 months ago — a reminder that Europe’s time-to-build is long. Second, it is perhaps interesting that the very “imbalances” the authors worry about at the global level become ordinary intertemporal allocation choices once one moves to a single-economy setup.
They lost me at "Trade is 'reciprocal' when it is mutually beneficial for countries." We know trade us mutually beneficial because otherwise the parties would't do the trade! (Presumably by referring countries instead of individuals (and thereby making in a category error) they mean to refer to trade that makes some third parties within a country worse off. But it would be silly to say that, so they don't.)
I vaguely recognized the names of some authors. I googled their names. They're all bureaucratic hacks! [The Italians say "inserito".] I have no reason to believe they are smart, aside from being successful bureaucrats, but whether or not they are, they are paid to lie for their countries.
The mind boggles to think the G7 European authors actually passed Econ 101. Sadly, too many in the US seem to want to emulate the European econ illiterates on this. I am afraid that we US and European residents will get the toxic prescriptions the G7 economic alchemists are shilling to and for politicians -- and get it good and hard.
Welcome back the potential for the Depressions of 1929, 1932 and 1937 when good people thought they were making things better but made them worse. Far worse. As Barton Swain notes in todays (6.18.2026) WSJ, often for government the best thing it can do in managing economics is nothing at all.
Europe’s growth is low by historical and comparative standards, but the continent is running a sizeable current account surplus. This suggests that Europeans are not ‘overconsuming’ as the piece asserts.
Enlightening, as always; yet, I doubt a sensible subset of economists would agree with you. Tell them about supply side economics and they get a mental paralysis - maybe they are in induced coma?
I have little doubt you are quite right in your criticisms.
But the “excessive deregulation” point is SO ridiculously obviously idiotic that I couldn’t handle paying attention to the rest.
I actually do kinda sorta understand how these guys have a shred of credibility on the rest, even given the idiotic stuff that I surely agree with JHC on that they are wrong on almost all of it.
That was the strangest part. I've come to expect nonsense like not recognizing that voluntary trade is mutually beneficial, by dictionary definition, but the idea that the EU suffers from too little regulation is a concept so absurd that only an intellectual could believe it, with apologies to George Orwell.
Well, it’s a G7 report (commissioned by France, currently leading the G7), not just EU, and was written by professors who are Chinese, American, British and German.
Insufficient capital requirements leading to excessive leverage? Maybe. Implicit bailouts a mega problem? Definitely.
But the idea of “excessive deregulation” anywhere in the G7 is somewhere between Orwellian and Alice in Wonderland.
The "consistent with national security" language is actually a valid point, although it's not one taught in economics. Free trade is only stable if both sides have the ability to deter aggression; otherwise conquest is the dominant strategy. Keeping potential enemies out of your military supply chains is sensible, even if it costs you potential gains from trade. The rewards of some trades aren't worth the risks.
I overstated it; it's a comment not a dissertation. Distance matters, and deterrence is a spectrum. We'll assassinate South American leaders but not invade; invasion is too costly.
From the European perspective dealing with an aggressive Russia, my claim was mostly true.
The trade-off shows up faster than the deterrence math suggests. Markets priced the Iran framework in hours; the Pentagon estimates six months just to clear mines from the Strait of Hormuz, and 20% of the world's oil sits behind that timeline. A supply line you can't reopen on your own schedule was never really yours, enemy or not.
This is a great essay. I fully agree with Cochrane’s judgment.
First, the word “imbalance” itself is often a pseudo-problem in economics. Terms such as “balanced growth,” “reciprocal trade,” “predatory competition,” “sectoral imbalances,” and “international solidarity” often turn political preferences into economic diagnoses. Voluntary trade is mutually beneficial by definition; otherwise, the transaction would not take place. The phrase “mutually beneficial for countries” in fact implies that national interests should stand above consumer welfare.
Second, Europe’s demand that China “raise consumption, expand welfare, and repair household balance sheets” is an absurd Western projection. Europe has slowed its own growth through welfare-state expansion and consumption subsidies, and now wants China to do the same. Europe keeps avoiding its real problems: excessive regulation, too many legal veto points, rigid labor markets, insufficient venture capital, and failed energy policy.
Third, the United States and Europe have long encouraged consumption, discouraged investment, and heavily taxed capital returns — and then complained about trade deficits. This is a classic case of “physician, heal thyself.”
Fourth, institutions such as the G7, IMF, WTO, FSB, and OECD have become deeply hollowed out. Bai Chong-En, Gita Gopinath, Hélène Rey, and Axel Weber are excellent economists. They should not have put their names on a report like this.
Someone needs to remind those economists that as Keynesian and post Keynesian adepts the official line on debt is as follows: there is no excess public debt as we owe it to ourselves. A laughable line debunked decades ago by Buchanan but still very popular with macroeconomists.
The G7 opinionated piece is déja vu all over again. I first heard such garbage in the 1980's. What do we have an international monetary system for?
I feel like I'm reliving my youth. Thank you, G7.
I remember from before and after the fall of the Berlin Wall: Before the fall, West Germany ran a current account surplus. This was derided as an imbalance, and West Germany was urged to consume more. I suppose that meant that the deficit countries could have appreciated. To what real benefit of the current account deficit countries I do not know. After the fall, Germany borrowed heavily to finance reconstruction in, and transfers to, the East. The current account surplus disappeared, and briefly went into deficit. Because repayment was credible, there was upward pressure on the Deutsche Mark. This was derided as an imbalance, too.
Fixed rates, flex rates, single currency, the underlying real phenomena are the same.
I now know the solution: Prohibit international capital flows!
Another factor that I think should not be underestimated is the intended audience, whose comprehension of basic economics is quite likely close to zero.
In my experience, when it comes to "professional" discussion and commentary on economics, >95% percent is meaningless drivel. People talk a lot, yet say very little. Everyone thinks they and everyone else sounds smart, but no one really has a clue. It is basically a rather bizarre performative ritual.
Excellent scholarly and intuitive points. Two comments. First, the report gives another endorsement of the Draghi Report, published only 21 months ago — a reminder that Europe’s time-to-build is long. Second, it is perhaps interesting that the very “imbalances” the authors worry about at the global level become ordinary intertemporal allocation choices once one moves to a single-economy setup.
They lost me at "Trade is 'reciprocal' when it is mutually beneficial for countries." We know trade us mutually beneficial because otherwise the parties would't do the trade! (Presumably by referring countries instead of individuals (and thereby making in a category error) they mean to refer to trade that makes some third parties within a country worse off. But it would be silly to say that, so they don't.)
I wish we could grow up and leave emotional language, imbalance, and return to mutual trade and create a dynamic market.
The USA MUST reduce its domestic expenditures and regulatory burden. At the same time we must increase our defense posture and expenditures.
Great post, except for one part
> They say the problem with France’s economy is that the French language has no word for entrepreneur
Entrepreneur is a loanword from French!
Do I really have to explain that's a joke?
I’m shocked! Economists lobbing veiled warnings and threats on behalf of their respective governments.
I vaguely recognized the names of some authors. I googled their names. They're all bureaucratic hacks! [The Italians say "inserito".] I have no reason to believe they are smart, aside from being successful bureaucrats, but whether or not they are, they are paid to lie for their countries.
The mind boggles to think the G7 European authors actually passed Econ 101. Sadly, too many in the US seem to want to emulate the European econ illiterates on this. I am afraid that we US and European residents will get the toxic prescriptions the G7 economic alchemists are shilling to and for politicians -- and get it good and hard.
Welcome back the potential for the Depressions of 1929, 1932 and 1937 when good people thought they were making things better but made them worse. Far worse. As Barton Swain notes in todays (6.18.2026) WSJ, often for government the best thing it can do in managing economics is nothing at all.
Europe’s growth is low by historical and comparative standards, but the continent is running a sizeable current account surplus. This suggests that Europeans are not ‘overconsuming’ as the piece asserts.
Enlightening, as always; yet, I doubt a sensible subset of economists would agree with you. Tell them about supply side economics and they get a mental paralysis - maybe they are in induced coma?
I have little doubt you are quite right in your criticisms.
But the “excessive deregulation” point is SO ridiculously obviously idiotic that I couldn’t handle paying attention to the rest.
I actually do kinda sorta understand how these guys have a shred of credibility on the rest, even given the idiotic stuff that I surely agree with JHC on that they are wrong on almost all of it.
But “excessive deregulation”?!?
That was the strangest part. I've come to expect nonsense like not recognizing that voluntary trade is mutually beneficial, by dictionary definition, but the idea that the EU suffers from too little regulation is a concept so absurd that only an intellectual could believe it, with apologies to George Orwell.
Well, it’s a G7 report (commissioned by France, currently leading the G7), not just EU, and was written by professors who are Chinese, American, British and German.
Insufficient capital requirements leading to excessive leverage? Maybe. Implicit bailouts a mega problem? Definitely.
But the idea of “excessive deregulation” anywhere in the G7 is somewhere between Orwellian and Alice in Wonderland.
The "consistent with national security" language is actually a valid point, although it's not one taught in economics. Free trade is only stable if both sides have the ability to deter aggression; otherwise conquest is the dominant strategy. Keeping potential enemies out of your military supply chains is sensible, even if it costs you potential gains from trade. The rewards of some trades aren't worth the risks.
If they focused on that then they would have exactly one valid point
That's fair.
“Free trade is only stable if both sides have the ability to deter aggression; otherwise conquest is the dominant strategy.”
Sorry, but this is not generally true, your claim notwithstanding.
We have stably traded with, e.g., most of South America for decades and decades despite their inability to deter our aggression.
Just because your claim is occasionally true does not make it mostly true, let alone entirely so.
Which is separate from your point about keeping potential enemies out of your military supply chain, where I *do* agree with you.
I overstated it; it's a comment not a dissertation. Distance matters, and deterrence is a spectrum. We'll assassinate South American leaders but not invade; invasion is too costly.
From the European perspective dealing with an aggressive Russia, my claim was mostly true.
The trade-off shows up faster than the deterrence math suggests. Markets priced the Iran framework in hours; the Pentagon estimates six months just to clear mines from the Strait of Hormuz, and 20% of the world's oil sits behind that timeline. A supply line you can't reopen on your own schedule was never really yours, enemy or not.
Unfortunately, deterrence only works when people consider the consequences of their actions. Not everyone does.
This is a great essay. I fully agree with Cochrane’s judgment.
First, the word “imbalance” itself is often a pseudo-problem in economics. Terms such as “balanced growth,” “reciprocal trade,” “predatory competition,” “sectoral imbalances,” and “international solidarity” often turn political preferences into economic diagnoses. Voluntary trade is mutually beneficial by definition; otherwise, the transaction would not take place. The phrase “mutually beneficial for countries” in fact implies that national interests should stand above consumer welfare.
Second, Europe’s demand that China “raise consumption, expand welfare, and repair household balance sheets” is an absurd Western projection. Europe has slowed its own growth through welfare-state expansion and consumption subsidies, and now wants China to do the same. Europe keeps avoiding its real problems: excessive regulation, too many legal veto points, rigid labor markets, insufficient venture capital, and failed energy policy.
Third, the United States and Europe have long encouraged consumption, discouraged investment, and heavily taxed capital returns — and then complained about trade deficits. This is a classic case of “physician, heal thyself.”
Fourth, institutions such as the G7, IMF, WTO, FSB, and OECD have become deeply hollowed out. Bai Chong-En, Gita Gopinath, Hélène Rey, and Axel Weber are excellent economists. They should not have put their names on a report like this.
Someone needs to remind those economists that as Keynesian and post Keynesian adepts the official line on debt is as follows: there is no excess public debt as we owe it to ourselves. A laughable line debunked decades ago by Buchanan but still very popular with macroeconomists.
LOL at "excessive deregulation"
This is an extraordinarily good can of 'whup-ass'.