Don’t ignore the gray rhino before you

Suh Kyoung-ho
The author is an editorial writer of the JoongAng Ilbo.

German Foreign Minister Annalena Baerbock last week had to cancel her trip to Oceania for meetings with political leaders in Australia, New Zealand and Fiji after the aged government plane was forced to return to Abu Dhabi due to mechanical problems. After trying everything, she had to give up the Indo-Pacific trip which was “more than annoying,” she wrote on Twitter. The German media described the incident as a humiliation for Germany which has such pride in manufacturing prowess. As German trains run so far behind the clock, some have been removed from the Swiss network, The Economist reported in its latest article, asking, “Is Germany once again the sick man of Europe?”

The German economy resembles Korea’s. Both rely on manufacturing and exports. In terms of output value, Germany is the fourth largest manufacturing power after China, the United States, and Japan. Korea competes with India for the fifth and sixth rank. Exports took up 50.3 percent of the GDP for Germany and 48.3 percent for Korea last year. Both economies benefited from China’s opening and expansion. Both weathered the global financial crisis better than others thanks to their robust manufacturing base.

But the German economy contracted in the final quarter of 2022 and the first quarter of 2023, and yielded zero growth in the second quarter. It is expected to report negative growth this year solely among major economies. The International Monetary Fund forecasts Germany will fall behind the United States, Britain, France and Spain in growth over the next five years.

The Economist points to Germany’s negligent investment in IT and new industries due to its complacency from the power of old industries. Its IT investment against GDP is less than half that of the United States and France. Red tape is running so deep that it takes 120 days to issue a permit to start a business, twice as long as the average of the OECD members.

Geopolitical risks also weigh over the German economy. The country relies on China most heavily among Western countries, with its annual bilateral trade amounting to $314 billion. Germany is also the biggest energy consumer in Europe due to its heavy reliance on manufacturing, but it no longer can rely on cheap natural gas from Russia for the industry. Its engineering workforce is also thinning due to its aging population. The chronic problems clogging the Germany economy — the overreliance on China, the exposure to geopolitical risks, the energy-powered economy out of sync with the green and low-carbon movement, and the fast aging of population — are precisely ours.

The gray rhino is a term referring to obvious risks that are neglected. You think you can avoid the rhino simply by keeping a certain distance from it. Economists are warning of a Lehman-like meltdown in China from a disastrous bursting of the real estate bubble.

In Korea, the finance minister, the central bank governor, and the heads of the Financial Services Commission and the Financial Supervisory Service meet every weekend to discuss macroeconomic issues. In the last meeting on Sunday, the senior presidential secretary for economic affairs also joined. The policy chiefs so far think the conditions are “manageable.” They reached the consensus that the escalated uncertainties from China’s real estate market and the spike in interest rates of U.S. treasuries will have a limited impact on the Korean economy.

The four financial heavyweights in the public sector could be right, but they nevertheless must build buffers for the foreign exchange market. One option could be extension of the forex stabilization measures by drawing in the National Pension Service (NPS). Last December, the pension behemoth was allowed to hedge foreign exchange risks by selling its dollar holdings on the forward market in a measure to ease soaring dollar demand on the onshore FX market. The foreign exchange stabilization measure is supposed to end in December this year. If the measure is extended, it can help contain the rise of the dollar value against the won in the market.

The four financial leaders can congratulate themselves for great teamwork against the shocks over the last year. Their fast response to the bond market upheaval following the default of Legoland Korea and liquidity woes of the Federation of Community Credit Cooperatives did help stabilize the financial market. They deserve a compliment for that, but whether they can equally well cope with the looming dangers — or the gray rhino — from Korea’s bulging household debt and China’s risks and stop a contagious spillover is uncertain. Few can define the character of the economic policy under President Yoon Suk Yeol. The government attributes it to its championing of the private-led economy. But it must have at least one signature policy to reinvent our economic fundamentals and build a new growth engine for the future.