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The New Global Political Economy

The New Global Political Economy

From Crisis to Supranational Integration

New Directions in Modern Economics series

Riccardo Fiorentini and Guido Montani

The expert authors provide an in-depth analysis of the causes of the financial crisis and the political economy measures required to build a safer and more stable international order. They show how the financial crisis is deeply rooted in the flaws of the dollar standard and explain why the dollar and globalization should be considered together to understand the present challenges. By way of conclusion, the authors propose the creation of a ‘World Eco-Monetary Union’ with the power to regulate the global economy and to promote sustainable development.

Chapter 2: Global imbalances and the dollar standard

Riccardo Fiorentini and Guido Montani

Subjects: economics and finance, financial economics and regulation, international economics, money and banking, political economy, radical and feminist economics


When trading in the world market, countries usually export part of their domestic production in exchange for imported goods. Because of the monetary nature of the modern economy, importing gives rise to a demand for foreign currency that countries meet by selling goods or services abroad. However, international trade is not necessarily continuously balanced year by year since deficits and surpluses may be temporarily financed through the accumulation or disposal of foreign assets. Historical data show that periods in which countries run a trade deficit (or surplus) are quite normal, often followed by years in which a trade surplus (or deficit) takes over. Developing countries, for example, need investments in an amount that very often exceeds domestic savings so that inflows of foreign funds, associated with the import of capital goods and a trade deficit, occur. When economic growth is consolidated, the external deficit eventually turns into a surplus so that the country’s trade is balanced in the medium term. In the language of modern international trade theory, what really matters is that a country satisfies an intertemporal budget constraint in which a current external deficit (or surplus) is matched by the present value of the sum of (expected) future trade surpluses (or deficits).

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