Tuesday, June 28, 2011

Asian lessons

"Watching Greece slide into chaos from 6,000 miles away is painful. Asia, after all, was the last region to experience what Europe may be about to endure. Asia’s implosion in 1997 toppled leaders, touched off riots, set back living standards a decade or more and tarnished the International Monetary Fund’s reputation. Expect similar developments as Europe’s grand monetary experiment cracks.

Asia and Europe are half a world apart and it is true that the differences are considerable. Indonesia, South Korea and Thailand were much less developed 14 years ago than their euro- zone counterparts are today. China had yet to emerge as a dominant manufacturing economy. The U.S. was also in a better position to offer international assistance than it is today.

With that in mind, here are five lessons Europe might learn from Asia.

No. 1: A default is unavoidable. What makes Europe’s bailout efforts so hard to watch is that they are so futile. The Greek public has been very consistent about one thing: the belief that it bears no responsibility for all the debt its leaders took on over the last decade. If that doesn’t provide the backdrop for debt repudiation, what does?

The U.S. and Japan are near recession. China’s boom continues to squeeze wages in uncompetitive economies such as Greece. This won’t end well for the euro zone.
Purge the Debt

No. 2: Recovery is quicker once debts are purged. Greece fudged its way into the common currency with the help of financial creativity.

Greece will have to restructure its debt, and the fallout from this will increase pressure on Portugal, Spain and Italy. If Greece had acted a year ago, markets might not be spending every waking moment on edge over how and when a default will arrive.

No. 3: Don’t forget reforms. In all the obsessing over debt, European leaders are taking their eyes off the need to retool in a world increasingly influenced by China. Fiscal austerity is important, of course, but so is altering policies to make economies more nimble, competitive and conducive to entrepreneurs who create jobs.

No. 4: Growth beats taxes when repairing fiscal balance.

Japan is a cautionary tale when it comes to rich nations getting incentives wrong. It issued mountains of debt, assuming for 20 years that it was just one stimulus plan away from 5 percent growth. That never happened.

Then, amid a ballooning budget deficit, it increased consumption taxes in 1997. That killed a nascent recovery.

No. 5: Markets are quick to forgive and forget. Yes, there’s a heavy price to pay for going hat-in-hand to the IMF. The key will be conditionality. There’s much griping in Asia about how the terms of Greece’s IMF package are far less stringent than those forced on Indonesia, Korea and Thailand.

Fresh starts are possible, though, as the powerful gains in Asian markets over the last 14 years attest. So drop the denial, Europe. Let Greece do what it needs to do, even if it means default, and move on. Asia shows there is life after crisis."

Euro Crash Looks as Inevitable as Asia in ’97: William Pesek

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