Resilience against a storm

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Resilience against a storm

The global financial market was shattered by the bombshell vote of the British opting to leave the European Union. As the outcome unexpectedly turned in favor of an exit, the British pound crashed nearly 10 percent on Friday, the lowest since 1985. The euro plunged by 4.3 percent, the largest fall since its birth in 1999. London and Tokyo stock exchanges sank by 8 percent, sending shockwaves across the globe. The U.S. treasury bond prices shot up to a five-year high as capital swarmed towards safer assets. The yen also jumped 6.3 percent. Korean shares and currency nose-dived. The British exit delivered record casualties around the world.

In economic terms, Britain’s choice is a no-win situation for all. The fifth largest economy is expected to shrink by up to 7.5 percent in the long run. It will lose its role as financial hub for the European community. The EU bloc will also be hurt by the reduction in trade and investment from its second-largest member, and the reputation of the largest economic bloc could be undermined by the danger of additional exits. The international order, in which the United States and the EU share a leading role, could also be shaken.

Still, the British chose to leave despite all the downsides. They were more worried about immigrants and terrorism than economic setbacks. Isolationist and protectionist policies could spread. The economic policies of major countries will clash more, further delaying recovery in the global economy.

For the Korean economy, when it rains, it pours. Our trade with Britain is relatively small at $13 billion a year, less than 2 percent of our total trade volume, but Korea could be pained by a further slowdown in China due to reduced exports to Europe. Contraction in external demand would damage the exports-driven local economy. Financial volatility is another worry. Although investment from Britain is not big, sagging market confidence would weigh on the market. Foreign capital could leave the market in search for safer assets in U.S. and Japanese currencies.

Authorities must put all possible policy means on the table. They must come up with a contingency plan for the worst-case scenario. The domestic industry must be fostered to compensate for the volatile external front. Labor market reforms, and other structural reforms, must be expedited. Both the government and the private sector must work fast to build resilience against a great storm.

JoongAng Ilbo, Jun. 25, Page 26

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