Time for ‘shock and awe’
In a stunning move, the Swiss National Bank on Jan. 15 lifted a three-year-old peg of its currency against the euro it staunchly defended over the last three years in an attempt to protect its exports from the European economic crisis. Since September 2011, the Swiss central bank had been purchasing “unlimited quantities” of foreign currencies to sustain a minimum exchange rate of 1.2 Swiss franc per euro. The global market trembled on the sudden move on the Swiss currency. The euro nosedived. The Swiss franc soared as much as 40 percent. Traders cried “Francogeddon!” as the Swiss-triggered shockwave wrecked havoc on global equity and capital markets.
Three years ago, the Swiss bank also stunned global markets and investors by deciding on unlimited intervention to enforce and sustain a peg against the euro to protect its economy against the spreading European mess. Switzerland’s economy is heavily dependent on exports and tourism revenue. It carried out exactly the opposite shock therapy three years later. Switzerland decided it could not go on with such costly intervention when the euro was bound to fall further after the European Central Bank carried out quantitative easing. It concluded that enforcing and maintaining the peg was “no longer justified.” It acted out a “well-thought-out decision” quickly and resolutely this time as well. After some time on the rollercoaster, the Swiss franc eventually stabilized.
The ECB approved on Jan. 22 a massive quantitative easing program - a 60 billion euro bond purchase program each month until the end of 2016. Over the next 19 months, 1.14 trillion euros ($1.27 trillion) will be released in 19 economies using the euro. This monetary policy coup on a monumental scale was way beyond expectations but was nevertheless received well by the markets. Although there is a lingering possibility of Greece leaving the eurozone, the ECB clearly sent a message that it was determined to fight deflation and restore the fortunes of the economic bloc.
A “shock and awe” therapy always has the downside of involving high stakes. It can be a simple win or loss. But high-risk gambles have been played by monetary authorities when they are faced with the existential question of “to be or not to be.” The U.S. Federal Reserve in November 2008 embarked on an unlimited bond-purchasing program and the Japanese central bank took a similar action in April 2013. This non-conventional monetary policy cost the Fed $4 trillion and the Japanese bank 137 trillion yen ($1.16 trillion). Money-pumping on such scale would have been unthinkable in the past. But the heavy investment worked for the United States, as its economy is picking up speed in what seems to be a sustainable recovery. The effects are yet to be seen with Japan, but its economy appears to have shaken off some of its long-standing lethargy.
It’s now Korea’s turn to perform some shock and awe. According to the Bank of Korea’s real gross national product preliminary figures, the economy in 2014 grew just 3.3 percent, having been mired in the mid or lower 3 percent range since 2011. Exports, which have primarily supported the growth, contracted 0.3 percent in the fourth quarter after a 2.2 percent fall in the previous three-month period.
Yet Koreans are not roused by such news of lackluster economic performance. The economy moves on sentiment. It is prone to self-fulfilling prophesies. Once it slips into the pit of doubtfulness and impotence, the economy inevitably loses steam and spirit. Koreans have begun to lose hope that they will return to the days when the economy was alive and kicking.
Korea is looking straight into a pit of stagnation that could last a decade or two. That is why it is in urgent need of shock and awe. The Bank of Korea must be more imaginative. It implemented cuts in interest rates twice by a combined 50 basis points, which helped little. The people must be shaken out of hopelessness. The government also must do its part more aggressively. It expedited fiscal spending of 46 trillion won ($46.2 billion) in the second half, which also did little. It is all talk on reforms of the civil service pension scheme, the labor sector, and public enterprises. The president is already in the third year of her five-year term. What the country needs is radical reform to breathe new life into the economy. The people will be willing to tolerate that kind of shock and awe from the government.
JoongAng Sunday, Jan. 25, Page 30
The author is the editor of business and industrial news at the JoongAng Sunday.
by Kim Jong-yoon