After Greece, damage control

The jitters over Europe’s debt woes will likely weigh on the international financial markets for some time amid skepticism over the European Union’s ability to clamp down and keep the Greek debt crisis from spreading to other weaker economies.

The local equity and currency markets, which took a double whammy from the European debt crisis and escalating tension between the two Koreas over the sinking of the Cheonan, have slowly calmed. Stock prices rose and the won also gained strength. The market recovered from its initial panic, suggesting it has built up resilience to external shocks. The government also acted aggressively to calm the market and shore up investors’ confidence.

But the storm is not over yet. The concerns over Europe’s financial and monetary woes persist, and tension on the peninsula will likely mount as North Korea remains defiant in the face of international calls to acknowledge and apologize for its attack. The government must not let down its guard until the underlying uncertainties are completely removed. Market participants also must refrain from acting too hastily on rumors and speculation. The government must come up with a lasting mechanism to curb the massive short-term capital outflows that have unsettled the currency market.

Authorities also must strive to keep the financial market’s jitters from spreading to the real economy. If the financial problems of the euro zone persist, they will likely lead to a credit squeeze and prolonged recession. An economic slump in the euro zone will hamper our exports to the region and dampen the fragile global economic recovery. The Wall Street-triggered financial cave-in that led to the global economic slowdown may repeat itself in the euro zone. European states have mapped out stringent austerity measures to tackle the fiscal problems, and their tightening could slow a regional recession, but on the way the global economy may sink into a deeper slump and find itself in a double dip.

South Korea stood out among global economies in quickly weathering the financial crisis. The economy recovered at a quicker-than-expected pace, beating initial growth forecasts. Local and foreign banks and think tanks all moved to upgrade forecasts for this year’s economic growth. But we must cast aside these rosy prospects and look candidly at the probability of a slowdown. Our optimism had been based on the recovery of the global economy. The government must join forces with the G-20 to help prevent further spread of the debt crisis and economic slump. It must re-examine its strategy, with the possibility of the economy taking a turn for the worse. All financial policies must focus on keeping the economy stable.