The United States under-saves and the euro zone over-saves: Which is right?

T he United States has a chronic external deficit and, since 2012, the euro zone has had an external surplus. The United States’ external deficit enables it to have a low savings rate and therefore high consumption; the euro zone’s external surplus reflects Germany’s and the Netherlands’ preference to invest outside the euro zone rather than within it, which reduces the euro zone’s short- and long-term growth. Moreover, the dollar and the euro are international reserve currencies: this would allow the euro zone to also have an external deficit financed without difficulty by investors in the rest of the world. The United States’ strategy is therefore superior to the euro zone’s, the limit being that the US external debt must not become so high that it jeopardises the dollar’s reserve currency status.