The powers that be

In 2010, economists dissected the catastrophic buildup to the U.S. subprime mortgage crisis and severe global recession after the immediate dangers were under control. The obvious villains coming under scrutiny: the reckless lenders who lent beyond the borrowers’ ability to repay by selling the deluded notion that the housing boom could go on forever; the greedy Wall Street bankers that sold risky mortgage securities disguised as glamorous investment instruments; the credit rating agencies that happily put investment grade ratings on that high-risk debt; and the daft consumers who went on a profligacy binge funded by debt. All of them were accused of contributing to the cycle of financial destruction. But at the end of the day, economists ended up pointing fingers at an entirely different culprit - the Chinese government. Its weapon was its currency policy.

Their argument was that Beijing artificially adjusted export prices downwards through systematic currency manipulation. It raked up astronomical trade surpluses with the United States. Instead of buying American products in return, the Chinese gobbled up U.S. debt, which helped fund the U.S. government and its consumers by keeping interest rates low. American economists concluded that Americans’ overspending was fed by intentional debt purchases by the Chinese, whose riches were earned through currency manipulation. Beijing was offended by the accusations, but officials and politicians in Washington were convinced of the truth of the argument.

The U.S. called for a fix in the trade imbalance during the G-20 summit conference in Seoul in November 2011. Washington bluntly told Beijing to keep its hands off the currency and purchase American products. Chinese President Hu Jintao resisted hard, but U.S. President Barack Obama was persistent. Although Washington failed to achieve what it aimed for - placing a cap on current-account surpluses or deficits to prevent them from hitting over four percent of the gross domestic product of each country - the Seoul G-20 communique nevertheless was laced with Obama’s prescription. Beijing was cornered to push up the value of the yuan. It also had to stimulate its domestic demand. Beijing is now struggling with the consequences: inflated real estate and stock prices.

We change the scene to Brussels, where leaders of the European Union held marathon talks on July 12 to squeeze out a new $96 billion bailout for Greece, its third since 2010.

Greek Prime Minister Alexis Tsipras, who stunned European leaders with a referendum to defy bailout terms, was outrageously rebellious according to the standards set by European decorum. The country had already received and wasted two bailouts which both amounted to 240 billion euros ($259.9 billion). Yet Athens blatantly asked for another bailout in addition to debt write-offs. Tsipras rightfully could not stand his country being stigmatized as a lazy, ungrateful nation. It was unfair to begin with, being in the same league with mighty countries like Germany and France and using the same currency as them.

A currency makes an equilibrium in trade between two different economies. If one side makes a loss in trade with another, its currency depreciates. When export prices go down and import prices go up, the deficit can be narrowed. It is the same principle of maintaining the balance in a boat if it is tilted to one side. But no equilibrium exists between Germany and Greece. A wagon drawn by an animal has been placed in a race with a Mercedes-Benz. The Greeks feel they have the right to demand that richer Germans help them get out of their debt pile for having been put in a contest without a handicap in the first place.

The argument is no different from what Americans argued against the Chinese. But the Greeks and Americans are in completely different leagues. Americans had the power to twist the arms of the Chinese to get out of their crisis. But Tsipras, beaten and humbled, was forced to swallow a bitter pill - a harsh reform and austerity program - and surrender the country’s financial sovereignty to his mightier European counterparts in return for aid. His people inevitably will have to go on an austerity program without a time limit in order to stay in the euro club. The international financial order is very much at the mercy of global powers. The predators are everywhere. We must always stay alert in order to not fall prey.

JoongAng Ilbo, July 20, Page 30

*The author is the business news editor of the JoongAng Ilbo.

by Jung Kyung-min