Judging by the latest economic data, the world confronts the risk of a US recession next year, brought on by a collapse in house prices. A recession would almost certainly lead to a fall in the US current account deficit, and possibly a further significant decline in the dollar’s real exchange rate. Only a fool would dare forecast the dollar’s exchange rate next year, or the precise mechanism through which global imbalances will eventually adjust. But there is a distinct possibility that the much predicted adjustment may be about to happen.

So what then? Among the wide range of views on this subject, two are particularly popular, one pessimistic, one optimistic – and both wrong. The pessimistic view is that a sharp and sudden adjustment in the US current deficit would hit the eurozone harder than other regions. Since many Asian and Latin American currencies are pegged to the dollar, the brunt of adjustment would fall on the euro, leading to a sudden collapse of European exports to the US. The optimistic view, often heard inside the eurozone itself, is that the trade exposure to the US is relatively small – eurozone exports to the US make up only about 4 per cent of gross domestic product. This suggests the eurozone would get off lightly.