Bubble in Austerity Shows Europe Is Ignoring 1997

By William Pesek May 24, 2012 7:00 PM ET

As Greece burns, European officials fiddle and Asia braces for another global crisis, my thoughts are on Thailand.
This summer marks the 15th anniversary of the baht devaluation that ignited one of history’s worst meltdowns. Thailand’s plunge ricocheted from Indonesia to South Korea to Malaysia before heading west. The pain went global with the Dow Jones Industrial Average plunging more than 500 points in a single trading day, hedge funds blowing up and giant bailouts becoming a norm.

About William Pesek

William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. His journalism awards include the 2010 Society of American Business Editors and Writers prize for commentary.
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Fifteen years on, the world finds itself upside down. In 1997, Asia sent contagion to the West; since 2008, Europe and the U.S. have returned the favor by sending turmoil eastward. Now, Europe is looking to deep-pocketed Asian nations for help. It should be doing something else: learning the lessons from Asia’s collapse and impressive revival.
Asia showed the world the danger of ill-timed austerity, denial and slavish devotion to conventional economic policies amid very unconventional circumstances. Why, then, is Europe resorting to a crisis-response toolbox that Asia clearly demonstrated doesn’t work?
Europe is still putting politics ahead of economics. In doing so, it’s missing two things Asians (MXAP) long ago accepted and internalized. One, the nature of the global financial system is shifting faster than summits and communiques can follow. Two, we live in a world without reliable economic engines.

Austerity Obsession

The former problem can be seen in the austerity obsession emanating primarily from Berlin. It’s one that can be traced back to the flawed advice that officials in Washington doled out to Asia in 1997. Back then, the U.S. Treasury and the International Monetary Fund demanded that Asia keep interest rates high to support currencies and cut government spending and debt.
Of course, even the U.S. blew off these suggestions, and more, after the 2008 failure of Lehman Brothers Holdings Inc. -- just as Asians had 10 years earlier. Once officials in Bangkok, Jakarta and Seoul (KOSPI) replaced belt tightening with more nuanced policies, growth returned and investors rushed back to the region. Today, it’s outperforming economies in Europe and the U.S. by a wide margin.
The latter problem -- the unreliability of global economic engines -- means that Europe’s need for stimulus is greater than Asia’s was in the late 1990s. At that time, the U.S. was indeed an “oasis of prosperity,” as then Federal Reserve Chairman Alan Greenspan called it. Today, Europe is looking at a vastly different global environment. And yet the region is experiencing what can best be described as a bubble in austerity.

China’s Ambitions

The U.S. economy is limping along, Japan’s deflation is deepening and China is slowing. Next week is expected to bring news that China’s manufacturing shrank for a seventh month in May. So much for China riding to Europe’s rescue with its vast state wealth and even bigger ambitions.
Just three months ago, the chatter was about Asia’s biggest economy becoming Europe’s sugar daddy. Europe is imploding. China has $3.3 trillion of currency reserves. What better way to deploy those riches, many mused, than to save the euro zone and capitalism in one fell swoop? That was until Europe’s mess boomeranged on China.
Nowhere are these worries more on display than in Hong Kong. The benchmark Hang Seng Index (HSI) has slumped 14 percent from this year’s peak on Feb. 29 as investors fret about how Europe will affect China. Far from reassuring markets, European leaders are clashing over how to contain their crisis. They can’t, and Hong Kong’s tycoons are looking at a difficult second half to 2012.

Greek Futility

Each Greek bailout only highlights the futility of political solutions to a flawed economic union. Denial has delayed the inevitable departure of Greece and now speculators have a much bigger target in their sights -- Spain, the 12th- biggest economy.
That was roughly Korea’s global ranking in 1997, when its entrapment by Asia’s crisis turned a regional problem into a global one. Europe is forgetting that the quicker you deal with the root of financial problems, however painful that may be, the quicker you can recover from them. To do that, you need growth. You also need to be bold.

Korea’s Example

Korea came clean rapidly about the true magnitude of its public and private indebtedness, retooled its economy and improved competitiveness. Greece has done little heavy lifting, be it restructuring debt, defaulting or leaving the euro. Denial and delay are setting the euro zone back.
Seoul’s post-1997 reforms are paying big dividends 15 years later. Today, when the nation tosses around the marketing slogan “Dynamic Korea,” no one is laughing. Samsung Electronics Co. is gobbling up market share and thrusting Sony Corp. toward irrelevance. Hyundai Motor Co. has Toyota Motor Corp. looking over its shoulder.
And Thailand, for all its political upheaval in recent years, boasts a jobless rate of 0.7 percent. The Bank of Thailand predicts growth of 6 percent this year.
Where will Spain be in, say, 2027? Will it be a top 14 economy, as Korea is today? Will its consumers be using euros or pesetas? It’s anyone’s guess. Europe’s failure to heed Asia’s lessons doesn’t leave me optimistic.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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