The leaders of debt-ridden Europe have got Asia on speed dial. The answers to the solvency nightmares of Greece and Europe’s other struggling economies, be they the purchase of bonds or contributions to the European Financial Stability Fund (EFSF), seem to European leaders like France’s Nicolas Sarkozy to lie at least in part in Asia’s cash-rich, high-growth nations.
Of course, the money trail that Greece and other eurozone debtors are now obliged to follow doesn’t only lead to Asia: the International Monetary Fund (IMF), the European Central Bank (ECB), the European Union (EU), the G-20 and the United States all have critical roles to play in restoring the economic equilibrium. There are many potential lifelines.
So where does Asia come in? Nowhere, many Asian leaders are arguing, pointing to the political folly of still predominantly poor countries like China or India spending their hard-earned reserves on restoring the comfortable lifestyles of better-off Europeans. However, a more self-interested approach would be to ask how vulnerable Asian economies really are to the eurozone’s potential failure, and to determine whether Asia, for its own sake, should take action to stop the European ship from sinking.
The global financial crisis of 2008-9 was instructive in revealing the extent to which Asia’s economic fate is still tied to that of the West. It became clear then that Asia wasn’t immune from catching the West’s colds, and that the continent was vulnerable through its reliance on a mixture of American and European trade and capital. Only a colossal stimulus package saved China, for example, from following the United States and Europe into crisis. So would things be any different this time around?
As of late 2011, Asia had only experienced marginal downgrades in expectations for the year ahead. The Asian Development Bank (ADB) has trimmed its regional growth forecast for next year from 7.8 percent to 7.5 percent; China is expected to grow by 9.3 percent, less than the 9.6 percent previously anticipated; and India’s growth outlook has dipped from 8.2 percent to 7.9 percent. These are hardly forewarnings of another 2009-style slump, never mind something even worse. Unfortunately, growth forecasts are fluid – and they could be revised much further downwards should Europe fail to effect a coherent rescue plan.
“If the current situation and political debate in Europe didn’t deteriorate further, Asian exports can continue to grow although with a bit of moderation,” explains Minsoo Lee, Senior Economist at the ADB. “In this case, the impact on Asian exports growth may still be kept limited. A slowdown in Europe and the U.S. can be compensated by healthy private consumption and investment, supported by growing intra-Asian trade. On the other hand, a disorderly resolution for the EU followed by another financial crisis could provoke a large negative impact on the U.S. and the world economy. In the case where the U.S. and EU slip into another recession, Asian exports will also be affected negatively.”
Rajiv Biswas, Chief Asia Economist at IHS Global Insight, subscribes to the view that Asia’s trajectory remains dependent on how Europe’s crisis plays out. Biswas regards Europe as being at a fork in the road, with the “muddle through scenario” on the one hand and the “chaotic scenario” on the other. “The muddle through scenario can enable Europe to have a mild recession and not a deep recession,” he explains. “In that scenario, Asia comes out fairly well, growth forecasts only slightly downgraded, they’re still relatively resilient.” This option is currently the more likely, Biswas believes, so long as the EFSF can be expanded beyond its current €1 trillion capacity, and provided the new Italian government implements convincing reforms. “However, if we go into the more chaotic scenario,” he warns, “bond yields rise, Italy starts to default, and you go into a more dangerous meltdown scenario. That would hurt Asia very badly.”