[Viewpoint] Containing the euro contagion

The European Union and the International Monetary Fund put together a staggering 750 billion euro (1,100 trillion won, $952 billion) financial package to eradicate risks in the euro zone before the Greek debt crisis spread contagious harm throughout the Continent.

But the global financial markets remain unconvinced and nervous because, regardless of the outsized bailout package, the elephants - the fiscal deficits of the weaker EU economies and the vulnerability of the entire euro system - are still in the room.

The embattled southern European economies lag far behind their stronger euro peers in competitiveness. Unlike their northern neighbors, they are little different from underdeveloped countries in terms of corporate governance and government efficiency. But after they joined the rich euro family, they over-stretched their spending and prompted property prices to skyrocket, which benefited from record-low interest rates and reckless cross-border lending practices. Those economies financed ever-widening current-account deficits through foreign loans, resulting in the current crisis of borderline bankruptcies.

The euro zone lacked any system to rein in financial recklessness among its members. In a decade under a single currency, the bloc failed to systematize any way of controlling individual countries’ fiscal policies or prepare contingency policies against such risks as low interest rates. Blinded by political ambition, the EU neglected economic common sense by accepting unqualified members into its family.

Now that the unprecedented relief program has been heaved together, is the southern bloc out of danger? At the very least, the staggering infusion of cash will erect a fence around the danger areas and provide a stopgap.

But it will be up to individual countries, as well as community leaders, to carry out a sweeping structural overhaul in the system in order to prevent a broader regional fiscal crisis and collapse of the euro.

The countries receiving lifelines must stick to their austerity programs to regain investors’ trust. Greece, Spain and Portugal all announced bold fiscal tightening measures. They require extreme belt-tightening, but persuading their people to follow through won’t be easy. Some fear too much tightening may exacerbate and prolong recessions.

Allowing self-sufficiency and fiscal liberty to revive the economies would be a better and faster way for these countries to pay off their debts. They should implement radical structural reforms to create a favorable investment environment and hone corporate competitiveness to attract foreign capital naturally. The EU should also offer greater support to economies that stand out in their reform efforts.

Along with individual endeavors, structural work must be done on the community level. The euro faces the biggest threat in its 11-year history. Leaders were late in coming together to act because risk came along before the community had established a risk response system.

It remains uncertain whether the members will be able to carry out their financial commitments contained in the package. Individual states may face internal wrangling over squeezing budgets and eroding their fiscal balances to help out other members.

It is no wonder the markets had their doubts about the rescue program. It is imperative for the EU to consolidate a fiscal system to resolve its structural weaknesses.

The community must strengthen surveillance over the fiscal state of its members and increase contributions to the EU budget, which remains at 1.2 percent of individual gross domestic product, to provide emergency funds to members in need.

The stabilization funds will keep the area safe for at least three years. But if the donors and countries receiving aid fail to keep up with their respective financial commitments and austerity, the crisis can only worsen. If the Greece domino knocks over Spain and the other weak economies start falling, there’s no telling what the consequences will be. That is why Spain is being closely watched.

The crisis in the euro zone likely won’t affect the Korean economy for now. But if the crisis worsens, no market will be safe. Therefore, incremental contingency plans against a major financial meltdown must be mapped out by strengthening monitoring in capital flows, dollar liquidity and currency swaps.

The government, as a chair country of this year’s G-20 Summit, should muster an international alliance to address potential risks. At the same time, the government should be prepared for a protectionist wave and put pressure on Asian markets for greater liberalization.

Companies must seek out new markets to make up for potential export losses in the euro zone. They should also keep their eyes open for acquisition opportunities to capitalize on the weak euro and privatization offers.

*Translation by the JoongAng Daily staff.
The writer is a senior research fellow at the Global Studies Department of the Samsung Economic Research Institute.

By Kim Deuk-kab