Euro Crisis: Impact on Asia

Europe seems distant from Asia, but warnings of economic collapse & great depression make keeping current essential.

In the photo above riot police try to disperse high school students in Athens on Monday. The students were protesting against a shortage of teachers and because they had not been issued school text books, while their parents were having to pay extremely high taxes and suffer from salary cuts or unemployment.

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FISCAL DISINTEGRATION: Why Asia should worry about the Euro crisis by Paul Donovan, Deputy Head for Global Economics at UBS Investment

The Euro should not exist. More precisely, the Euro should not exist in its current form, with its current membership

A monetary union of 17 countries with little in common (beyond geographic proximity and a history of invading each other) was never likely to work.

This crisis seems to have been inevitable. I, and most of the rest of the economics profession, have argued against the Euro (in its current form, with its current membership) for 16 years.

So the Euro should not exist. However, the cost of breaking it up is hideous. Rough calculations suggest the Greek economy would halve in size if Greece were to exit the Euro zone. That is a far greater cost than anything Asia experienced in the 1997-98 crisis.

If Germany were to try to exit, it would cost it a quarter of the German economy.

There are also political costs. The economic damage (and unemployment) would be the worst since the 1930s. In extremis, that economic pain could provoke anything from widespread social unrest to military government or even civil war.

This leaves Europe trying to work out how to make the Euro work. The solution must involve some kind of fiscal confederation. No monetary union has ever survived without a fiscal union alongside it.

Unfortunately, the politics of fiscal integration are not playing out smoothly. Euro-area politics sometimes seems akin to the politics of the playground. Politicians seem inclined to yell "shan't" whenever economists ask them to play nicely with one another.

The Euro will develop in time. Unfortunately the process is unlikely to be rapid or easy. The Euro area seems set to experience a series of crises in the coming years. Each crisis will be accompanied by uncertainty, market volatility, and consequences for Asia.

Why should Asia care about the crisis of the Euro area? For two reasons: the current account and the capital account.

Asia does a lot of trade economy in the world, with Europe. The European Union - the larger grouping of 27 countries, to which the Euro group belongs - is the largest singleaccounting for 27% of GDP. In comparison, the United States is 23% of global GDP. Asia - excluding Japan and Australia, but including China and India - is 18% of the world economy. Asia exported US$541 billion to the EU in 2010. Europe swallows 16% of Asia's exports directly before accounting for the intra-Asian trade that ultimately feeds European demand (for instance, South Korea exporting components to Thailand which then exports a finished product to Europe).

If the Euro is hit by a series of crises, then weak Euro zone economic growth seems likely. The Euro area will be a less dependable source of demand for Asian exports. Which means Asian demand will have to substitute for Euro area demand.

When looking to Asia's capital account, it is obvious that the Euro area has been an important investor into Asia in recent years - both in financial assets and in direct investment.

With the advent of the Euro crisis, Euro area investors are keen to have their capital in liquid assets, in Euro currency, and to take profits where they can. All three factors suggest repatriation from Asian financial markets. That now seems to be happening.

Moreover, with financial market turmoil in the Euro area, it seems quite likely that governments will increase financial sector regulation. Some of the policies of the past two decades, which liberalised capital flows, may be reversed.

If banks, insurers, or pension funds are told to increase holdings of Euro bonds (for "prudential" reasons), they will be less able to invest overseas. 

The future flow of capital from the Euro area to Asia will be less than it has been in the past few years. Indeed, the capital flow could be substantially less.

Asia cannot afford to ignore the Euro area. The debates across the chancelleries of Europe are unpleasant to watch, but Asia must pay attention. What happens with the Euro will have an impact on Asian economies and markets in years to come.

Asia must change to meet the challenge of a more crisis-beset Euro area. Asia needs to rely more on domestic demand and more on domestic capital.

So what happens now?

I look at the rest of this year with apprehension. It seems inevitable that Greece will default. For financial markets, the question of Greek default is "when" not "if".

But "when" is very important. If Greece defaults before there is a plan to assist Euro banks and stabilise the financial system, then the crisis could escalate into catastrophe.

The Euro area needs to stabilise (potentially to recapitalise) the Euro area banks. Then, and only then, can Greece be allowed the dignity of an orderly default.

While I hope and believe that Euro zone politicians understand this, there is always a risk that politics triumphs over good sense.

Paul Donovan is deputy chief, Global Economics, for UBS Investment Bank

(Source: Bangkok Post, FISCAL DISINTEGRATION, Why Asia should worry about the Euro crisis, 5/10/2011, Paul Donovan, Deputy Head for Global Economics at UBS Investment, link) 

Euro Crisis Vocabulary

the Euro - the common currency of members of the European Union, which means all the governments have a common money policy (See Wikipedia)
crisis - an urgent, difficult or dangerous situation; a situation that has reached and extremely difficult or dangerous point วิกฤต วิกฤตการณ์ ช่วงวิกฤต

Euro crisis - the current crisis in Greece and other countries in the Euro Zone, the cause being possible default on goverment debt, also called "European Sovereign Debt Crisis" (See Wikipedia)

fiscal - related to government spending (and taxation and borrowing to pay for this spending) 
disintegration - when things are falling apart and not working anymore
fiscal disintegration - when a government is becoming unable to pay for its spending (or the interest on debt from its past spending)

riot police - (See Wikipedia)

disperse - (of a crowd of people) to separate, scatter and make leave in different directions สลายฝูงชน  ทำให้กระจัดกระจาย
riot police disperse protesters - riot police break up groups of protesters and make them leave a place

shortage - when there is not enough of something การขาดแคลน

issued school text books - given school books to learn from

suffer - to experience physical or mental pain
salary - a fixed amount of money that you earn each month or year from your job เงินเดือน
salary cuts - reducing salary

unemployment - 1. people without a job; 2. the percentage of people in a country who are without work but available for work and currently seeking work (See Wikipedia) การว่างงาน การตกงาน

precisely - exactly อย่างเที่ยงตรง,อย่างถูกต้อง,อย่างแม่นยำ,อย่างแน่นอน,อย่างละเอียด
more precisely, ... -

current - of the present time ปัจจุบัน
should not exist in its current form 

monetary union - when a group of countries shares the same money or currency such as the Euro, also called a "currency union" (See Wikipedia)

in common - done or shared by two or more people ที่ร่วมกัน
with little in common - do not share anything, have any common interests 

proximity - the state of being near in space or time ความใกล้ชิด
geographic proximity - near to each other on the map

invade - enter another place by force 

inevitable - certain to happen, unavoidable ที่เลี่ยงไม่ได้   ซึ่งหลีกเลี่ยงไม่ได้
profession - a type of job requiring advanced training and education
economics profession -

hideous - very bad, terrible, awful
rough calculations - not exact calculations

exit - leaving a place ทางออก
exit the Euro zone - leave the Euro monetary union 

Asia1997-98 crisis - the economic crisis that Thailand and the rest of Asia suffered after 1997 (See Wikipedia)

quarter - 25%

worst - most + bad
worst since the 1930s - only the great depression of the 1930s was as bad as this

In extremis, - in the most serious and extreme situation that could happen

provoke - to deliberately try to cause a reaction, especially an angry one ยั่วยุอารมณ์, ทำให้โกรธ ก่อให้เกิด ปลุกระดม ปลุกเร้า
widespread - happening or existing in many places, or affecting many people อย่างแพร่หลาย
widespread social unrest - when many people are not happy in society and have big protests (like the red shirts)
civil war - when there is a war between different groups in a country

survived - continued to live or exist รอดมาได้

fiscal - connected with the government budget and government spending, i.e., public money เกี่ยวกับงบประมาณ
fiscal confederation - a group of countries that make one spending budget together and also have the same tax system and borrow to finance deficits together  
fiscal union - same as "fiscal confederation"

No monetary union has ever survived without a fiscal union alongside it.

integration - the process of combining with others to create a single unit or system การรวมเข้าด้วยกัน, การผสมผสาน
the politics of fiscal integration are not playing out smoothly

akin to - similar to, same as
politics of the playground - politics like arguing children in a playground

yell "shan't" - say loudly "you can't"

process - a series of actions that you take in order to achieve a result แนวทางปฏิบัติ, กระบวน, วิธีการ
rapid - happening quickly อย่างรวดเร็ว

experience a series of crises - one crisis, then another crisis, then another crisis, .... repeated over and over again ..

accompanied - went together with ติดตาม, ร่วมทาง, เดินทางไปด้วย

volatility - 1. when thigns change suddenly and unexpectedly (bad because it makes it difficult to make decisions) ความไม่แน่นอน 2. a measure of risk in financial markets, the degree to which asset prices swing up and down (See The Economist and glossary) อัตราความเสี่ยงต่อการลงทุนทางการเงิน

consequences - the things that happen as a result of a decision or event

current account - roughly money coming into and going out of a country from exporting and importing goods and services (See Wikipedia)
capital account - investment and loan money coming into and going out of a country (See Wikipedia)

intra-Asian trade - exports and imports between Asian countries
trade - the buying and selling of goods การค้าขาย
ultimately - finally, after a series of things have happened ท้ายที่สุด, ตอนสุดท้าย, ในที่สุด
demand - the need and desire to buy goods and services by households and businesses

intra-Asian trade that ultimately feeds European demand

GDP - the total value of all the goods and services produced by a country in one year
global - throughout the world, all over the world, including the whole world ทั่วโลก ทั้งโลก
global GDP - the total value of all goods and services produced around the world

components - parts
source - the place or person something comes from or starts at, or the cause of something ต้นกำเนิด, แหล่งกำเนิด

The Euro area will be a less dependable source of demand for Asian exports

substitute - a person or thing that is used instead of another person or thing คนหรือสิ่งที่เข้าแทน

obvious - clear; easy to see, recognise or understand ชัดเจน

investor - a person or organisation that puts money into a company in exchange for a future profit นักลงทุน
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)

assets - a thing of value that a person or a company owns, for example: stocks, bonds, real estate, loans to others, or money ทรัพย์สิน

financial assets - when people buy stocks and bonds issued in a country (in the currency of the country)
direct investment - when foreign companies set up factories in the country

the advent of the Euro crisis - the beginning of the Euro crisis

keen - very interested, eager or wanting (to do) something very much สนใจ, ใจจดใจจ่อ สนใจอย่างยิ่ง
currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
liquid assets - cash or assets that are turned into cash easily (that are nearly the same as cash)

keen to have their capital in liquid assets  

currency - the money used in a country
take profits - sell something and turn any gain (capital gains) into cash

factors - one of the things that effects a situation or event ปัจจัย

repatriation from Asian financial markets - taking money out of Asian stock and credit markets and bringing it home
repatriation - to send something like money or an actual person back to their country that is legally their own การส่งกลับประเทศ

turmoil - a situation of great disorder and confusion ความปั่นป่วน
financial market turmoil - disorder and confusion in financial markets (such as the stock market)

sector - a part of the economy ภาค (เศรษฐกิจ) (public sector = government, private sector = all businesses, household sector = families and consumers, banking sector,...) (See Wikipedia)
financial sector - the part of the economy that raises money for companies via stocks and loans and for individuals via loans

regulation - an official rule that controls the way that things are done กฎระเบียบ ระเบียบข้อบังคับ
financial sector regulation

reverse policy - stop a policy of the past 

decades - periods of ten years เป็นสิบๆปี

liberalised - to make the rules for an industry less strict or to reduce them, so it is easier to do business and for new companies to enter the industry
liberalised capital flows - allow it to be easier for investment money to flow between countries

pension fund - a system for saving money when young and working to spend during retirement when not working เงินบำเหน็ด บำนาญ (See Wikipedia)
bonds - agreementd by a government or company to pay back the money that investors have lent plus a fixed amount of interest on a particular date; a document containing this agreement (See Wikipedia)

ignore - to not give any attention to something important (that needs a lot of attention) ทำเพิกเฉย
afford - to not have to worry or think about something สามารถทำได้
cannot afford - must worry about something
cannot afford to ignore - must not ignore (must pay attention to)

impact - an effect or influence ผลกระทบ

challenge - a difficult to achieve goal; something that needs a lot of skill, energy, and determination to deal with or achieve สิ่งที่ท้าทาย, การท้าทาย
meet the challenge - be able to achieve the difficult goal or "challenge"

beset - to cause someone difficult or danger over a period of time รุมเร้าด้วยปัญหา รุมเร้า
crisis-beset Euro area - the area that uses the Europe, that has a lot of problems nowadays

domestic - within the country ภายในประเทศ
rely more on domestic demand and more on domestic capital.

apprehension - a feeling of worry about something that might happen ความสงสัย,ความกลัว, ความหวาดหวั่น

default - failure to repay a debt การผิดสัญญา
inevitable - will happen for sure
seems inevitable that Greece will default.

stabilise - to reach a state where there are no longer any major changes or problems ทำให้มีเสถียรภาพ
stabilise the financial system

escalate - to become much worse or more serious ทำให้มากขึ้น ทำให้เลวลง ทำให้เลวร้ายลง
the crisis could escalate into catastrophe - the crisis could become a lot worse

potentially - may happen; possibly เป็นไปได้ ที่อาจเกิดขึ้นได้

recapitalise banks - put money back in banks (owners equity) so they can start making new loans (loans can only be made if owner's equity is large enough)

default - not paying back loans on time
orderly default - when plans are made before the default

dignity - acting in a calm and controlled way, in a way that makes people respect you
allowed the dignity of an orderly default

triumph - win
risk - the possibility that something dangerous or unpleasant might happen ความเสี่ยง
risk that politics triumphs over good sense