The eurozone sovereign-debt crisis is under control, at least for the time being, after Greece announced that it had managed to convince a high proportion of its private creditors to accept a bond swap. The bond-swap deal aims to cut US$140 billion from Greece’s national debt, with bondholders accepting a face-value loss of 53.5 percent in exchange for new bonds with more favorable repayment terms.
The European debt crisis has been the focal point of the global market since it began to emerge in early 2010 and structural problems have rapidly spread to most European countries during the period. Through financial and trade linkages, the whole world is vulnerable to the damage. Among the troika — the European Central Bank (ECB), the EU and the IMF — the ECB has been striving to stop the problem from spreading by adopting a three-year, long-term refinancing operation, the European version of a quantitative easing measure, to calm the market and reduce soaring bond yields.
These recent positive signs could only signify temporary relief of a potential disaster. On the other hand, the productivity of European countries is still fragile and countries with debt troubles no longer have the luxury to freely adopt monetary operations in response. Overreliance on fiscal spending would do nothing but lead to economic hardship. Many therefore believe that an economic structural reform is needed to stimulate economic growth in Europe. In other words, structural reform is essential to help Europeans cope with the crisis, as well as to restore market confidence.
Italy is an example of a country that has undergone structural reform, during which Italian Prime Minister Mario Monti’s government introduced a set of austerity measures, adopted a package of labor market reforms, stemmed worsening economic conditions by increasing taxes, introduced pension reforms and measures to fight tax evasion and opened certain professions to more competition by reforming its licensing systems and abolishing tariffs on services.
Besides Italy, Spain has also announced new austerity measures designed to reduce its budget deficit after a new EU emergency fund was announced to help eurozone countries. Spain cut its deficit from 11.2 percent of GDP in 2009 to 8.5 percent last year, and the new government, led by Spanish Prime Minister Mariano Rajoy, aims to reduce the deficit to 3 percent next year.
Austerity measures could be a double-edged sword. On the one hand, they could narrow the fiscal deficit. On the other hand, they might slow down the pace of recovery. Obviously, economic structural reform is not appreciated by all and we have seen many Europeans take to the streets to protest against such a formula. The European debt crisis has caused further side effects, such as high unemployment due to shrinking demand and financial protectionism because of the credit crunch. The latter effect has caused small and medium-sized enterprises in emerging economies to have difficulties acquiring sufficient funds.
The design of the eurozone could be a problem because members can no longer utilize monetary operations independently. However, they could adopt expansionary fiscal policies, before a series of summits earlier this year decided to place some restrictions. Evidence shows that the common currency did generate some benefits during the good times, but it has also made the eurozone’s less competitive members suffer during the bad times. The Portuguese, Irish, Italians, Greeks and Spanish cannot simply devalue their currencies to regain price competitiveness on exports like they used to.
In theory, regional integration eliminates barriers, reduces transaction costs and promotes optimal allocation of resources.
Before the crisis, Asia looked to the EU and the eurozone model with much admiration. Ironically, the model of success has turned into a lesson on failure. Perhaps it is too early to conclude the euro has malfunctioned, but Asians no longer feel the need to follow the European path, as even the home of numerous great economists could make a mistake. What Asians can do is examine their own economic conditions before proposing further integration.
Taiwan has not been very successful in participating in economic integration. For example, Taiwan’s current free-trade coverage stands at only 5 percent if the Economic Cooperation Framework Agreement (ECFA) with China is counted. That means pursuing further economic integration should be the main objective for President Ma Ying-jeou’s (馬英九) administration. However, Taiwan should pay attention to the European experience. Taiwanese need to jump on a train that will take them to the desired destination.
Darson Chiu is director-general of the Chinese Taipei Pacific Economic Cooperation Committee.
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