Wednesday 06 Oct 2021 | 21:08 | SYDNEY
Wednesday 06 Oct 2021 | 21:08 | SYDNEY

Eurozone: Selective Asian Crisis lessons


Mark Thirlwell

12 June 2012 17:57

There's an interesting op-ed in the FT arguing that Europeans should learn the lessons of the 1997-98 Asian financial crisis. Since one result of the eurozone experiment has been to trigger what looks very much like a classic emerging market crisis around the European periphery  an overvalued exchange rate, balance of payments strains (albeit partially disguised by the Target2 settlement system), and a sovereign debt problem – its certainly appropriate to look at what other emerging market crises might teach us.

But what makes the piece particularly interesting is what it does and doesn't say. So it seems to me that the authors are right to remind us again of the very different kind of policy response advocated in both cases, and are likewise correct to urge more policy pragmatism on the part of European policymakers.  And it's also noteworthy to see some worries expressed about the seniority of Chinese creditors in the event of further debt restructuring: yet another telling indicator of our changed world economy that emerging economies are worrying about their credit exposure to the developed world.

But two other things struck me about the piece.

First, the rapid speed of adjustment in East Asia in the late 1990s was greatly assisted by the role played by large real exchange rate depreciations in producing a rapid turnaround in external imbalances, and by a relatively benign external environment.   Those real depreciations were delivered by major swings in the region’s nominal exchange rates: something which is, of course, not on offer for individual member economies stuck in the Eurozone.   And the current external environment is very far from benign.

Second, the Op Ed’s authors talk approvingly of the way in which in Asia the 'people had to tolerate hardship, and they did not believe in the magic of street demonstrations.' Really? I must have imagined the protests in Indonesia opposing increases in the price of gasoline and electricity, not to mention the May 1998 riots and the whole fall of Soeharto thing (which had its fourteenth anniversary last month). Even the Koreans, cited approvingly in the piece for their self-sacrifice of gold) to support their government, still got around to registering their dislike of IMF-imposed austerity measures.

Photo courtesy of Wikipedia.