Comparing EU crisis with Japan and East Asia

These comparative approaches help a great deal. You get a sense of how do current crisis/events compare with orevious such events.

Benoît Coeuré of the European Central Bank points to similarities and differences between the three crises:

What are the parallels between the Asian crisis in 1997–1998 and the euro area crisis? The economies of emerging Asia were characterised by buoyant growth and a brisk expansion of credit (see Chart 1). This rise in debt was facilitated by considerable inflows of foreign capital, which financed significant external deficits (see Chart 2). This led to growing financial imbalances, and in particular to currency and maturity mismatches on the balance sheets of local banks. In addition, the economic boom prevailing at that time was accompanied by a loss of competitiveness of the region’s export sector. Investors typically under-priced potential risks as they had overly optimistic expectations of the medium-term growth prospects. They did not identify systemic vulnerabilities such as the risk of sudden stops in capital flows or of twin crises of the banking system and the balance of payments,
which eventually materialised.

Except for currency mismatches, similar developments were evident in the euro area before 2009 – if not at the regional level, at least in those countries that later ran into financial difficulties. It was widely believed that sudden stops in capital flows, not to mention twinbanking and balance of payments crises, could not happen in advanced economies.2 And yet this is exactly what happened in Europe ten years after the Asian crisis (see Chart 2).It seems therefore useful to look also at East Asia’s response to its crisis and see what lessons can be learned.

Lessons:

One lesson is that a deep and fundamental restructuring of the domestic financial sector is necessary

A second lesson is that institutional and structural reforms are essential

A third lesson is that re-nationalisation and protectionism are not the solution to a crisis

In the end..some language lessons:

Let me draw to a close by re-emphasising that crises, despite their negative consequences, can have positive effects. They can galvanise efforts and focus minds. They can drive change and bring about progress. They can pave the way for innovative solutions. But to secure these gains, cooperation across national borders is crucial, in other words, there must be a willingness to work towards common goals and to learn from each other and resist protectionism. This spirit will be essential to tackle the challenges still ahead of us, not only in the euro area but also at a global level.

It is often claimed that the Chinese and Japanese word for crisis, wēijī or kiki (危机 or 危機), is made of the two characters meaning “danger” and “opportunity”. While there can be no doubt that wēi means “danger”, I would rather understand jī as meaning the critical moment when things have to change – the ancient Greeks’ kairos. This critical moment has now arrived for Europe. Europe has emerged from the danger zone. It’s time for us to get our act together, to reform, and to grow.

Nice bit..

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