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from Expert Zone:
What the Euro means for Asia
(The views expressed in this column are the author's own and do not represent those of Reuters)
The Euro should not exist. In a perfect world (run by economists) the Euro would never have been created. Sadly, however, the world is not perfect -- and it is run by politicians. The result is an entirely dysfunctional monetary union.
The Spanish economy has youth unemployment approaching 50 pct. The Greek economy is in its fourth consecutive year of negative GDP growth and will embark on a fifth year of negative growth later in 2012. Euro area countries have to share a common interest rate and a common exchange rate with Germany -- where unemployment is at a 20-year low and growth is positive if unspectacular around 2.5 pct. This is an unworkable situation -- what Greece needs is very different from what Germany needs.
Will the Euro break up? We must hope not. The consequences would be devastating (a weak country could see its economy halve in size on exit). The social unrest we have today is minor compared to what could take place if the Euro were to fragment. As the Euro was essentially a political creation, it must be political will that keeps it together -- and it would be wrong to underestimate that political will.
So what will happen? Because so much rests on political decision making, the path for the Euro area is hard to determine. But it seems highly likely that there will be a recession this year. How bad that recession is depends on what happens to the banking sector. Euro area banks are increasingly reluctant to lend money -- and with all the risks that they have been through over the last six months, this is hardly a surprise. Slower bank lending growth will hit some economies particularly hard.
Fiscal austerity is being urged by Germany. In the wake of France’s downgrade (and with the UK outside the Euro and unlikely to ever join) it is Germany’s voice that is loudest in setting the Euro policy agenda. When the slowing credit creation is combined with further fiscal austerity, the consequence is likely to be negative GDP growth. Not all countries will be negative, of course, but Italy, France and Spain all seem likely to see a drop in economic activity.
So why do the convulsions of the Euro area matter to Asia? There are three reasons why Asian companies and investors need to follow the Euro drama.
from Expert Zone:
There is no place like home
(Paul Donovan is a Managing Director and Global Economist at UBS. The views expressed in this column are the author's own and do not represent those of Reuters)
Most economists believe that nearly everything in this life can be reduced to an economic explanation.
This even applies to popular culture. The Wizard of Oz has been explained as a parable of late 19th century economics, as a veiled commentary on the gold standard versus the use of silver that dominated the 1896 presidential election in America. The yellow brick road is gold, the cowardly lion was William Jennings Bryan (a pro-silver politician). The wicked witches represented Wall Street (east) and railroad interests (west). Dorothy had to put on silver shoes to make her way to the Wizard of Oz (the U.S. President). She then learned that she could escape the bizarre, fantasy world of Oz and get back to reality by clicking her heels and repeating “I want to go home”.
Confronted by the bizarre, fantastic world of the Euro today, investors could learn from the Wizard of Oz. Global investors may well want to click their heels and mutter “I want to go home”. After two decades of globalising capital flows, investors may once again feel the urge to have their money at home, or at least closer to home than has been the case hitherto.
Why should investors favour home or regional markets? In a rational world, investors should search for the best risk adjusted returns they can find, and put their money there. However, as the Euro only too clearly demonstrates, we do not live in a rational world.
There are two forces at work here. The first is the fact that political risk is playing a larger and larger role in the world’s financial markets. Governments have an increasing impact through regulation, government debt (and default fears), intervention in currency and bond markets and policy statements.
What this means is that the performance of markets can no longer be interpreted through economic activity alone. Increasingly, one must understand the political environment and the likely changes that that environment may bring to bear on investments. For many investors this is a development that they have not experienced before: political risk was a declining force in financial markets in the two decades that preceded the global financial crisis. The problem is that political risk is very often specific to a country or to a culture.
from Expert Zone:
Asia and the euro crisis
(Paul Donovan is a Managing Director and Global Economist at UBS. The views expressed in this column are the author's own and do not represent those of Reuters)
The euro should not exist. More precisely, the euro should not exist in its current form, with its current membership.
A monetary union of 17 countries with little in common (beyond geographic proximity and a history of invading each other) was never likely to work. This crisis seems to have been inevitable -- I, and most of the rest of the economics profession, have argued against the euro (in its current form, with its current membership) for sixteen years.
So the euro should not exist. However, the cost of breaking it up is hideous. Rough calculations suggest the Greek economy would halve in size if Greece were to exit the euro. That is a far greater cost than anything Asia experienced in the 1997-98 crisis. If Germany were to try to exit, it would cost it a quarter of the German economy. There are also political costs. The economic damage (and unemployment) would be the worst since the 1930s. In extremis that economic pain could provoke anything from widespread social unrest to military government or even civil war.
This leaves Europe trying to work out how to make the euro work. The solution must involve some kind of fiscal confederation. No monetary union has ever survived without a fiscal union alongside it. Unfortunately, the politics of fiscal integration are not playing out smoothly. Euro area politics sometimes seems akin to the politics of the playground. Politicians seem inclined to yell “shan’t” whenever economists ask them to play nicely with one another.
The euro will develop in time. Unfortunately, the process is unlikely to be rapid or easy. The euro area seems set to experience a series of crises in the coming years. Each crisis will be accompanied by uncertainty, market volatility and consequences for Asia.
Why should Asia care about the crisis of the euro area? For two reasons -- the current account and the capital account.
long on rhetoric, short on detail
austerity and the ECB have brought the euro down in value, enabling more competitive export-led growth and less debt-fueled consumption
this is the riposte to the deluded who said greece, ireland etc should abandon the euro because they couldn’t devalue their currency
eurozone countries have wealth, innovation and a greater sense of solidarity that contradicted the apocalyptical shrieks from the anglo-saxon wasp media
donovan, your article is more lip-service to forex speculator heartbeats than recognition of the eurozone’s resilience, its institutions and wider sphere of influence
when europe sneezes, the world catches a cold