Asian and European crises compared

Asian and European crises compared Prof. Dr. Peter Mayer Dr. Peter Mayer

Asian crisis revisited • 1997: Four Asian countries (Thailand, Indonesia, Malaysia, South Korea) suddenly faced serious economic problems. • IMF came to the rescue and coordinated reforms, provided funds and facilitated access to finance • After a two year period of reform and adjustment, countries quickly return to normal (high) growth rates. Dr. Peter Mayer

Growth rates of Asian economies Dr. Peter Mayer

European crisis revisited • 2008: The world financial crisis affected virtually all European countries. • The implosion of the housing bubble, the rescue efforts for banks, the decline of economic activity, and the stimulus measures by governments led to a steep increase of public debt. This resulted in a combination of three crisis: of sovereign nations, of banks, of growth, and finally the Euro. • Five countries are particularly affected: Greece, Ireland, Spain, Portugal, Italy Dr. Peter Mayer

Growth rates of key European economies Dr. Peter Mayer

Lesson 1: vulnerability • Economists overlooked the various dimensions of vulnerability. We have to have a more careful and broader look at the risks involved. • Public/private, short-term/long-term, maturity, currency risks … In Korea and Ireland, it was private debt, in Greece it is public debt, in Korea it was debt denominated in foreign currency, in Greece it was debt in domestic currency. In Spain the problem is (partly) the term structure etc. Dr. Peter Mayer

Lesson 2: stability in assessment • The high volatility in assessing the strength of national economies implies that caution is advisable, for those in ministries of finance, in banks and funds. • Our understanding of economic mechanisms and their interplay with political, social and other factors is more limited than we thought. Dr. Peter Mayer

Lesson 3: ability of governments to act • The ability of government to react in a time of crisis is key for solving the crisis • This has various dimensions: • Willingness of leadership to address challenge • Ability of government to design and implement reform • National culture to deal with crises • Political regime Dr. Peter Mayer

Lesson 4: institutional mechanism for dealing with crises need to be in place • The specific trajectory of a crisis cannot be predicted, but some plans, some preparation of processes and procedures is necessary. • The IMF was basically ready to work in Asia • The complete lack of preparation of emergency plans made things worse in the case of Europe. Dr. Peter Mayer

Lesson 5: Despite weaknesses – the exchange rate is a powerful tool • There are many good reasons to criticize the volatility of foreign exchange markets and their ability to come to sound assessments. • But the big advantage of flexible exchange rates is the force of thousands of investors whose decisions bring about an adjustment which politicians only rarely manage to bring about. Dr. Peter Mayer

Conclusion • A study of the crises reveals some key lessons: • Let us be more skeptical about market assessments • Politics, administrative capacity of states and national culture matters • Flexible exchange rates, despite weaknesses, have an important virtue: they are not (or less) restrained by political interests Dr. Peter Mayer

Asian and European crises compared