October 27, 2011Coming Crisis Could Be More Severe Than 2008
The euro zone crisis could have a more severe impact than the 2008 crash, according to a leading economist from the Asia Development Bank.
Iwan Azis told Korea JoonAng Daily: "The impact can be more severe than in 2008. At least for two reasons. The first reason is that in 2008, only the U.S. was in trouble. But now, it’s also Europe. The second reason is that many countries in Asia have already used their weapons in 2008 to counter the pressure by bringing in stimulus policies."
Azis said Asian economies should prepare new stimulus measures, even if they will have less effect than in 2008. He also recommended an international agreement to tax cross-border currency transactions in order to reduce volatility.
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Euro zone crisis will be worse than 2008: ADB
Oct 27,2011
Iwan Azis
The negative impact on the global economy of the ongoing crisis in the euro zone will be “more severe” than the aftermath of the collapse of Lehman Brothers in 2008, according to a leading economist from the Asian Development Bank (ADB).
“The weakening of the European economy combined with very slow recovery in the United States will result in a weakening global economy for a rather long time,” said Iwan Azis, head of the ADB’s office of regional economic integration.
“In 2008, it was only the U.S.,” said the Indonesian economist, adding that the U.S. was at the time “saved” by Europe.
“The present crisis, however, is both [affecting the U.S. and Europe],” Azis said. “And it’s going to have a negative effect on the global economy because whether we like it or not, Asia is closely connected to the U.S. and Europe in trade and finance.”
Azis, who was speaking in an exclusive interview with the Korea JoongAng Daily, was visiting Seoul to participate in the Asia 2050 seminar, co-hosted by the Ministry of Strategy and Finance and the ADB.
He said the financial sector, which served as a catalyst for the U.S. meltdown three years ago, did not spread quickly through Europe.
During the interview, Azis also spoke about the Korean government’s swift response to the latest global financial turmoil, including its decision to expand the volume of currency swap deals with Japan and China.
Azis formerly served as an adjunct professor of economics at the Johnson Graduate School of Management at Cornell University in the U.S.
Q. How will the global financial crisis impact Asia?
A. The impact can be more severe than in 2008. At least for two reasons. The first reason is that in 2008, only the U.S. was in trouble. But now, it’s also Europe. The second reason is that many countries in Asia have already used their weapons in 2008 to counter the pressure by bringing in stimulus policies. As for the impact on the financial side, the Asian financial sector is not heavily exposed to the sovereign debt in Portugal, Greece and Spain. But we have to remember that problems in these peripheral European countries will eventually affect other major economies in the European Union like France and Germany. And the Asian financial economy will be affected by that.
Can Asian countries take any pre-emptive measures?
In general, it’s time for stimulus [measures] but it will be more difficult [than in 2008] because many countries in Asia, including China, already used huge stimulus [measures] back then. So policy is getting more limited. But limited doesn’t mean they don’t have it.
Asian countries’ macro economies are relatively healthy, so they have policy space to intervene through fiscal and monetary policy. Trade and the financial sectors are interlinked. The volatility is at its highest point right now, and this will eventually affect the trade sector. Asian policy makers should be vigilant in terms of how they respond to this.
What is your view on Korea’s recent announcements about expanding its currency swap deals with Japan and China?
I salute Korea’s move to expand its swap with Japan ... Foreign investors, because of their financial balance sheets, are having to pull out of Asia. This creates volatility. And that is the point, that Korea has strong justification in trying to dampen the potential attack on its currency. Engaging in this swap is very much the right thing to do, and I’m hoping that more countries will make similar plans, perhaps all the members of the Asean+3 countries [10 Asean nations plus Korea, Japan and China], through the Chiang Mai Initiative [a multilateral currency swap deal among ASEAN countries that was launched in March 2010].
We have that infrastructure already, and this is a golden opportunity for the Asean+3 to empower and speed up the process of the Chiang Mai Initiative as part of crisis prevention and management.
Are there any other measures to reduce volatility? What about Tobin taxes [on cross-border currency transactions]?
The Tobin tax issue is rather controversial as we’re not talking about the flow of money into one country. If a country imposes Tobin tax but others don’t, the system is not going to work. It should be agreed internationally, or at least regionally. Theoretically, however, I’m personally in favor of it, because if we take the analogy of imports and exports, there is always tax. But why not in the financial sector?
How would you evaluate the Korean government’s reaction to the recent global financial crisis?
My grade for the Korean government in dealing with the recent global crisis is an A-. Of course, there is room for improvement, and I’ll apply this not only to Korea, but also many others. Asian countries have to be more careful in dealing with social issues. Many Asian countries are becoming more democratic and open, like Singapore and Myanmar. But social issues should be taken care of by policy makers. If they are left unchecked, it can be a major trap for growth. This is a warning.
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