The unravelling euro crisis will soon result in some countries leaving the currency zone, but this should not unduly worry Asia, except for companies with a business presence in countries that exit the euro, according to the independent macroeconomic research group Capital Economics.
“There would soon be [a] breakup from the euro zone to necessarily allow the European Union, particularly key economies like Germany, to pursue and adopt appropriate measures for their own good and the overall region,” said Julian Jessop, chief global economist and head of commodities research with Capital Economics, which was established in 1999 and today has more than 200 companies as its clients.
“It would be in the interests of the ‘stronger’ countries that remain in the euro to support the exit of their weaker partners,” the firm concluded in a paper released in May this year.
“Although there would be some denting of the stronger countries’ competitiveness by the devaluation of the exiting country’s new currency, they would ultimately benefit from the departing economy being stronger, thereby both improving the market for their exports and improving the quality of any continuing financial claims that they may have on this country.”
A breakup of the euro zone, while causing short-term economic pain, would also have some positive impacts, such as lower commodities prices, and an increase in energy efficiency improvements.
He said that with the gradual slowdown, crude oil should touch US$70 per barrel in 2020, as in medium and long term the crisis would lower demand. The decrease in oil prices would lead to lower food prices as well.
But the scenario is not as gloomy as it may appear, because valuable lessons have been learned from the 2008 financial crisis. Significantly, global economic policymakers are now more coordinated in their actions, said Mr Jessop, adding that bodies such as the International Monetary Fund have become much more flexible in responding to countries’ urgent needs.
Certainly, however, some impact from the exit of certain economies such as Greece and possibly Spain and Italy, would be felt by companies that had trade and business links with those economies, said Mr Jessop.
For now, though, the mainstream view in the EU is to continue promoting drastic austerity measures in the most troubled countries to get their finances in line, as the European Central Bank does not want to see a breakup.
But the problems will not go away; budget austerity needs to be accompanied by lower budget deficits — hence protracted domestic demand in an economy such as Spain.
“Sorry to say that this is not yet the beginning of the end of the Euro crisis,” said Mr Jessop.
Ben May, economist in charge of European markets at Capital Economics, added even if austerity measures adopted by troubled economies win approval and lead to the release of bailout funds, it’s still just a bailout. Debt to GDP ratios are still too high, so Europe does not yet have sustainable debt conditions.
“We might see Greece leave (the euro zone). Ireland will soon follow. Italy and Spain are still in trouble. Individually, these countries might need to allow their currencies to float and default,” said Mr May.
Looking at the impact of a worsening EU economy on Asia, he said China had been able to sustain its economic growth by promoting a surge in domestic demand, but the country also knows it is in for some trouble as exports have not been as strong as in the past.
As for India, he said the country was shielded from the impact of high exposure of exports to the EU, unlike other economies in Asia, as a lot of the economic growth in India is driven by domestic demand.
But Hong Kong, Malaysia and Singapore, he said, would be hard-hit by fallout from the euro zone and a protracted crisis as they export a lot of products to the region.
On a positive note, Mr May believes the current crisis should not create a major shock on the scale of the Lehman Brothers collapse, though Greece still needs close watching. “This time the global financial crisis has provided unconventional approaches and some are taking different steps to deal with it promptly,” he said.
Although Mr Jessop emphasised that there would be a deep recession in Europe as consumer confidence has been very weak, the US has gradually been showing signs of recovery while China continued to stimulate demand at a healthy rate.
But huge challenges remain in China, he said. The property market is volatile, and there is uncertainty about whether the new Communist Party leadership will continue pro-reform policies. As well, maritime territorial disputes with neighbouring countries are worrisome.
Asean has been doing quite well, he noted. “Domestic demand is still strong in Indonesia, Thailand’s economy is driven by flood-recovery measures, the Philippines has a decent growth rate,” said the chief economist.
Nick Baird, the chief executive of UK Trade and Investment, said the international community needed to help China get more involved in solving world problems.
“China must engage and we must try to engage China,” he said. “China cannot just stay there and be China, but unfortunately that’s not the obvious view in the west, except from the UK.”
There is a strong case to be made for engagement because whatever China decides to do is going to affect everything in Asia Pacific, said Mr Baird.
“It’s in everybody’s interest to keep dialogue going for free and peaceful maritime passage in this part of the region. Asean will be much more effective in this regard.”
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- Writer: Achara Ashayagachat