In this featured commentary, SIIA Chairman Simon Tay discusses the implications of the sovereign debt crisis in Europe here in Asia, and what Asians can do.
This story was featured in the TODAY (Singapore) newspaper on 17 October 2011.
Fears about Europe have rippled through the global economy and Asian markets are not immune. At times, assurances are given and the euro rallies but the euro zone crisis is far from over. The rescue of Greece is just one issue. Far larger greater risks are posed from spillovers to other economies and European banks.
United States Treasury Secretary Tim Geithner has warned against catastrophic risks and called for stronger measures. European finance ministers have met and leaders pledge to present how they will deal with their crisis to the G-20 by early next month.
Will this be effective? Given the possible global impacts, what should Asians expect? What, if anything, can the Asians do?
Some Europeans hope that Asians would mobilise their considerable reserves to buoy them up. When Chinese Premier Wen Jiabao toured Europe last month, offers were plentiful to sell government bonds and open up to investments. In the private sector, European banks need capital and are touring Asia to attract wealthy individuals and cash-rich companies.
The Asian response has been less than forthcoming. Mr Wen believes European "countries must first put their own house in order" and not rely on China.
Some other Asian voices flatly refuse to help. Irked by European attitudes of superiority, they see the crisis as confirming Europe's irrelevance. They contrast the sharp reforms administered in the Asian crisis of 1997 to 1998 and wonder whether Europe's heavy representation on the IMF excuses special treatment.
Yet, Asia should not sit on the sidelines, grumble about past mistreatment and feel somewhat gleeful about the turn in circumstances. Even if it is an understandable sentiment for some, that would not be the best policy.
Despite talk of euro-irrelevance, a considerable interdependence remains. As the crisis has deepened, Asian growth expectations have been trimmed. While China and India have their own domestic dynamics, developed Western markets remain a significant factor for Asian exports.
Since the middle of this year, exports from South Korea, India and Thailand have slowed. So have European investment flows and lending from banks. Europe continues to matter.
Asia probably has enough momentum and regional drivers to ride out a slow growth period. But a prolonged and deeper recession in the West holds substantial risks. Falling exports to the West could force firms in Asia to cut jobs and capital expenditure. This could then combine negatively with falling asset prices and capital outflows.
Some predict a slow-motion political crisis and a decade of downturn. A European problem that big and that protracted cannot but affect Asia.
Yet, while such possibilities loom, Germany and France have sent positive signals. The European project faced crisis before and emerged reinforced. European leaders are expected to do enough to avoid sure disaster, even if not to immediately and decisively solve the problems. Asians should avoid being overly pessimistic.
There are real limits to what Asians can do. Their priorities continue to be domestic and regional. Beijing cannot provide a safety net. After the huge stimulus effort at end 2008 and a flood of credit, China's banking system needs reinforcement.
But China and other Asians need be involved. One way is to lend their voice to encourage effective and timely European action. Active Asian participation in the relevant international fora such as the IMF and G-20 is needed. There have been long-standing calls to better reflect Asia's growing part in the world economy. Now is the time not only to claim a seat but to show what Asians can bring to the table.
What of Asia's own regionalism? Many Europeans used to parade the superiority of their system and even proposed an Asian common currency a la the euro. The crisis will increase scepticism about European approaches.
But this should not put Asian regionalism on a pedestal. Asia must find its own ways to provide safeguards against crisis and increase regional cooperation. In that search, European experiences will still be useful to examine, even if not to imitate blindly.
Even if Asians will not emulate the euro zone, Asians should expect Europe, with some confidence, to do what is needed. Europeans have prided themselves as responsible stakeholders in the global system and their project for union, while currently under stress, has gone further than anyone else. Writing off Europe is not in Asia's interest.