A euro for a dollar?The government officially believes that the damage from the Greek credit crisis on our economy will be “limited.” We agree - for now.
Shipments to and from Greece and four southern European countries make up just 2 percent of our total trade.
But it becomes a different story if the Greek crisis starts to spread through the weaker economies of the European Union.
The nearly $1 trillion relief program backed by European leaders and the International Monetary Fund is a stopgap measure, offering only a little breathing room in the tightly interwoven economic bloc.
The extreme austerity measures and fiscal belt-tightening in the region could dampen the fragile recovery in consumption and may lead to a double-dip recession across the globe.
Investors are already hedging against such a possibility. Foreign investors net-sold more than 5 trillion won ($4.2 billion) worth of Korean stock this month. They collectively turned to safer assets, sending international gold prices to all-time highs.
Meanwhile, the drop in the value of the euro is raising alarms on the export front.
The euro is hovering at $1.2486, compared with $1.60 two years ago.
The euro is quickly losing ground against the Korean won as well. Two years ago, the euro was exchanged for 2,000 won. Today, the rate is 1,400 won. The euro is fluctuating greatly on the fear of foreign exchange losses. The euro takes up one-third of total foreign direct investment to Korea, or a total of $234.3 billion.
Exports to the euro zone account for 12.8 percent of Korea’s total overseas shipments, exceeding exports to the United States, which account for 10.4 percent of the total, and Japan, which is 6 percent of the total. If the euro slips further, exports to the euro zone will be become more expensive.
However, the euro is unlikely to recover in the near future as the euro zone is mired in an intricate cross-border loan structure that makes it difficult for weaker economies in the region to break away from the credit crisis. UBS forecasts that the euro could hover below $1.174, which is where it started in January 1999, and could one day even cost less than a dollar.
The Greek crisis is only the prelude to a euro crisis. Therefore, we should prepare ourselves for the day when a euro equals a dollar. We cannot let ourselves be deluded by the belief that the crisis will have only a “limited” effect on our economy. Companies must raise their non-price competitiveness by honing their design and technologies so they can ride out fluctuations in the foreign exchange rate.