Lack of fiscal integration alongside commitment to a common currency was a serious design flaw in the original European enterprise. The new fiscal disciplines will allow more room for the European Central Bank to act as lender of the last resort to European borrowers. Whether these ‘architectural’ arrangements for European cooperation will be sufficient to save the euro will finally depend, of course, on how and whether they encourage the ‘substantial’ structural reforms and adjustments necessary to restore growth momentum in the deeply indebted southern European states.
Faced with shrinking economies and rising unemployment, and lacking exchange rate flexibility to restore price competitiveness in external markets, how can the sick economies of Europe get to grow again? Without the option of deeper currency depreciation, real wage cuts and structural reform are the only way to export-oriented growth — outside the OECD economies — in emerging markets like those in Asia.
As Shinji Takagi argues, the European mess has revealed just how inept Europe’s supra-national institutions were in dealing with a regional problem of the proportion that has emerged there. Inter-governmentalism — that is, a willingness to cede position and sovereignty through decision making in the collective interest — moved centre stage as the instrument of crisis management. French President Nicolas Sarkozy and German Chancellor Angela Merkel had to call the shots for the rest of Europe. France and Germany are providing critical leadership: despite over half a century of regional institution building, the huge Brussels bureaucracy proved little more than a paper tiger. The implications for Asian regional cooperation are profound.
In Asia, a central question is whether strong growth can be maintained despite continuing weakness in the developed world. Success in avoiding that scenario also depends on whether extensive structural reform is put in place to shape the expansion of Asian investment — so that it continues to roll out in ways that ensure it is productive and that economic growth does not run into the sand.
Asia does not need a huge supra-national bureaucracy, but it does need its own measure of inter-governmental cooperation to keep growth on track. It has the architectural frameworks, in APEC and the East Asian arrangements, to give this effect — if it is so minded.
On recent evidence, emerging market economies in Asia and elsewhere might have had some reason to think that there was ‘trend decoupling’ between their growth rates and those in the old G7 economies. But events of the past six months should have dispelled that illusion, as interdependence through expectations and market sentiment, as well as more directly through trade and finance, has ensured that problems in the industrial economies wreak their havoc and uncertainty around the rest of the world. De-coupling Asia from European growth clearly has its limits.
The Asian emerging market economies are, nonetheless, in a stronger position than their industrial country partners, with demographic dividends still to reap, much lower debt ratios, and economies that enjoy the benefit of powerful ‘catch up’ to the industrial-country frontier. The potential rate of growth in emerging economies remains high because the ‘convergence gap’ — the gap between productivity levels in industrial countries and developing economies — remains large even for economies like China and India. This hasn’t changed because the rest of the world has fallen into recession.
With these assets, what’s to stop emerging economies powering the global economy from its industrial-country malaise?
Wendy Dobson in this week’s lead essay suggests that Asia’s focus should be on ‘re-balancing’ and trade liberalisation. Expectations of Asia’s role, Dobson says, are growing much faster than Asia’s capacity to meet them.
In Asia too regional architecture is required for cooperative action. And Asian regional architecture still lacks tight and effective links to emerging global architecture around the G20 process.
‘Yet with some notable exceptions’, Dobson points out, ‘Asia’s focus remains on the architecture rather than the domestic and regional economic adjustments required to sustain growth momentum in the face of potentially serious external shocks from renewed European recession and near-stagnation in the United States’. On trade liberalisation, Dobson puts faith in the recent US Trans-Pacific Partnership (TPP) initiative.
Others would prefer broader regional and continuing global efforts, given that China has not been engaged in the TPP and due to other circumstances in the international economy.
Without Chinese engagement in what is putatively Asia’s primary trade liberalisation enterprise, the TPP is unlikely to give much strength to the heart of Asian integration nor to global trade.
Peter Drysdale is Editor of the East Asia Forum