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September 11, 2013 April 19, 2013
Opinion Business
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Leading reports from Asia’s best business newspapers
Yomiuri Shimbun
Emerging markets’ Euro nemesis Daniel Gros
Director of the Centre for European Policy Studies
Japan is seeking bilateral summit meetings with South Korean President Park Geunhye and Chinese President Xi Jinping, with whom Prime Minister Shinzo Abe chatted for the first time on the sidelines of the G20 summit in St. Petersburg last week. “We’ve been saying that the distance [between Japanese and Chinese leaders] has narrowed, with [the brief dialogue between Abe and Xi] being one example,” Chief Cabinet Secretary Yoshihide Suga said. “With Xi meeting Abe, it will be easier to hold a meeting between the two governments’ lower-level officials,” he added.
Taipei Times Taiwan’s exports totalled US$25.64 billion last month, an increase of 3.6 percent from a year ago and 1.3 percent from the previous month, the Ministry of Finance said. For the first eight months of the year, exports totalled US$201.39 billion, up 2.5 percent from a year ago, the report showed. “Demand from major export markets remained steady last month,” Yeh Maan Tzwu, director of the ministry’s statistics department, said. The trade surplus widened to US$4.51 billion last month, up US$1.15 billion from a year earlier.
Jakarta Post Finance Minister Chatib Basri said that Indonesia was in negotiations with three countries regarding Bilateral Swap Agreement (BSA) as a precautionary measure the government may take if it needs unexpected liquidity assistance. “The countries include Japan but I cannot reveal the others,” Mr Chatib said. He added that the BSA was crucial in the face of a potential crisis as it would assist the government if it faced financial difficulties and would guarantee a fiscal anticipation measure.
Straits Times As Singapore developers start gearing up for a subterranean future, experts have warned of the pitfalls of going underground. They say plans for a possible network of tunnels, malls and research labs could fall foul of the island’s patchy soil formations and built-up landscape. These factors could push up costs and make life difficult for planners, who would need to get even more businesses on board. On the other hand, burrowing into the earth could provide valuable room to build in space-scarce Singapore. “Our land boundary is finite,” said professor Yong Kwet Yew of the National University of Singapore.
E
merging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilise their countries’ financial markets. Who is to blame for this state of affairs? A few years ago, when the U.S. Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. They viewed the Fed’s openended purchases of longterm securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when U.S. policymakers reversed course. At first sight, these fears appear to have been well founded. As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere”. The mere announcement that the Fed might scale down its unconventional monetarypolicy operations has led to today’s capital flight from emerging markets. But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit. The real culprit is the euro.
expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest. Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand. This is what has happened in the U.S., and its recent economic revival has been accompanied by an expansion of both exports and imports.
Capital flows
The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral. But austerity in Europe has had a profound impact on the euro zone’s current account, which has swung from a deficit of almost US$100 billion in 2008 to a surplus of almost
Quantitative easing in the U.S. cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years. This is also what one would
Emerging-market leaders should have complained about European austerity, not about U.S. quantitative easing
US$300 billion this year. This was a consequence of the sudden stop of capital flows to the euro zone’s southern members, which forced these countries to turn their current accounts from a combined deficit of US$300 billion five years ago to a small surplus today. Because the externalsurplus countries of the euro zone’s north, Germany and Netherlands, did not expand their demand, the euro zone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation.
Made in Europe This extraordinary swing of almost US$400 billion in the euro zone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. So the real reason for the euro zone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25 percent). The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and,
with the exception of China, swung into deficit). Thus, if anything, emergingmarket leaders should have complained about European austerity, not about U.S. quantitative easing. Fed chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe. The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the euro zone periphery today. But who will then be able – and willing – to run deficits? Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the euro zone, given the euro’s status as a reserve currency. But both appear committed to running large surpluses (indeed, the two largest in the world). This implies that, unless the U.S. resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. And any global recovery promises to be unbalanced – that is, if it materialises at all. © Project Syndicate