gems - the euro’s fate - and does it matter for asia?

In this Report:A Structural View of the Crisis•Euro’s Fate: Three Scenarios•Is the Eurozone Crisis Containable? •What does it mean for Asia?•

The Euro’s Fate: And does it Matter for Asia? By Dr Yuwa Hedrick-Wong

Close-Up ReportFebruary 2011

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a decade since the introduction of the single currency, it has become abundantly clear that not only has monetary integration failed to in-duce economic integration, it has actually led to the emergence of two diametrically opposite growth models within the Eurozone. On the one hand, there are the Ger-man bloc countries (Germany, Austria and the Netherlands primarily) which are export-efficient and competitive, have high savings, rising productivity and increasingly flexible labour markets. Then there are the crisis countries of southern Europe and Ireland which have become highly dependent on cheap credit and

GEMS©GEMS©Chart 1. A nalytic Underpinnings of the Scenarios: Eurozone’s Structural Incompatibility GEMSSM

“...the euro today is like a straightjacket that fits no one in the Eurozone.”

A Structural View of the Crisis

Ireland followed Greece in receiving a bailout package of €85 billion (US$112 billion) in the last week of November 2010. This was in spite of concerted efforts by the European Central Bank (ECB) and the International Monetary Fund (IMF), and with the establishment of the Euro-pean Financial Stability Fund (EFSF), to contain the crisis from spreading, ever since the bailout of Greece earlier in the year. Yet spread it did. Now the question is: what is next?

The Eurozone crisis is clearly deepening. While most commentaries and analysts focus on the level of debts in the Eu-rozone, this GEMS report takes a structural view on the crisis in

order to develop a most likely sce-nario of how it may be resolved. Debt levels are important1 but a structural analysis is needed to get to the roots of the crisis. Without an appreciation of the structural conditions that led to the cur-rent crisis in the first place, it is virtually impossible to work out what the future may hold for the Eurozone.

In conducting this struc-tural analysis, the overarching conclusion I reached is that the original architecture framing the integration of Europe through the single currency has now been shown to be invalid. The archi-tects who designed the euro and the politicians who launched it believed that monetary integration would, over time, lead to eco-nomic integration and eventually to political integration. Now, over

1 See GEMS Bellwether Report, At the Edge of

Order and Chaos: the Dynamics of Global Economic Recovery,

January 2011.



debt-driven consumption, with low or declining productivity and increasingly reliant upon govern-ment spending and the public sec-tor for income and employment generation, and with the excep-tion of Ireland, are internationally uncompetitive in exports. Ireland, while not exactly in the same league as the south-ern European crisis countries, has been undone by the same abundance of cheap credit that its banks could access by virtue of simply being in the single curren-cy zone. It was the bursting of the cheap credit-fueled housing sector bubble that pushed Irish banks to the brink of disaster in November last year. Thus, the fundamental problem of the Eurozone must be seen in light of this structural

incompatibility between these two growth models. Chart 1 shows the sharp divergence of unit labour costs between Germany on the one hand and the crisis countries on the other, spanning the period between 1999 to 2009. German wages had basically stayed unchanged throughout the last decade, enabling productiv-ity to surge and making German exports increasingly competitive, while its labour market was gradu-ally made more flexible. The crisis countries, on the other hand, were fattened on cheap credit and lived way above their means. To probe deeper the nature of this internal structural incompatibility of the Eurozone, a technical analysis is conducted, applying what is known as the Obstfeld-Rogoff methodology to estimate the level of the euro’s

exchange value that would lead to a balanced current account in the various Eurozone countries2. The results are summarised in Chart 2 and they are quite astonishing. For Germany to have a balanced current account (as opposed to its present current account surplus), the euro needs to be traded at US$2.35. In other words, given the structural condi-tions of the German economy, the euro is far too cheap, or very com-petitive, depending on your point of view, for Germany. In contrast, the euro has to get to as low as

2 This analysis involves assessing the level of

exchange rate depreciation required for a country to achieve

a balanced current account without a downward deviation

from its trend rates of output, employment and inflation.

Specifically it computes the terms of trade for the country in

question, taking into account the relative prices of tradables

expressed in terms of non-tradables in order to find a level

of currency depreciation that would allow a subsequent

balancing of the current account deficit.

GEMS©GEMS©Chart 2. A nalytic Underpinnings of the Scenarios: Eurozone’s Structural Incompatibility

* Estimated with adapted Obstfeld-Rogoff (2004) methodology

(1.34)

(0.31) (0.34)

(1.11) (1.29)

(0.53)

2.35

-170.00

-140.00

-110.00

-80.00

-50.00

-20.00

10.00

40.00

70.00

Ireland G reece S pain F rance Italy P ortugal G ermany

Required euro % change expressed as a log change (implied Euro/Dollar rate)

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US$0.31 in order for Greece to have any chance of achieving a balanced current account. Thus, the euro today is like a straight-jacket that fits no one in the Eurozone. It also impedes the crisis countries from dealing with their fiscal and current account deficits flexibly. Locked into the single currency, these crisis coun-tries are left only with the very painful option of “real deprecia-tion”, depreciating their wages and prices instead of the currency in order to work their way out from under the mountain of debt that they have accumulated. This is one of the key reasons why do-mestic politics will play such an important role over the coming few years in determining how the crisis may be resolved. From an economic point of view, Germany is literally leaving the crisis countries be-hind. Germany’s rising economic efficiency and productivity has

been supercharged by the weak euro (relative to its level before the 2008/09 global financial crisis), making German exports today hyper-competitive. Chart 3 shows the rapid recovery of German economic growth in 2010, despite a sharp contraction in real GDP of 4.7% in 2009. The fact of the matter is that Germany is able to export successfully to some of the fastest growing emerging markets – especially China and India – in the aftermath of the 2008/09 cri-sis. For example, sales of Mercedes in China in 2010 are estimated to have doubled that of 2009. Ger-man exports to the BRIC coun-tries in 2009 accounted for an impressive 36% of total exports, whereas it was only 9% and 10% respectively for France and Italy. As these emerging markets are expected to continue to lead the global economic recovery, Germany’s competitiveness will continue to move it farther away

structurally from the crisis coun-tries in the Eurozone. The struc-tural incompatibility between the German bloc countries and the crisis countries of Greece, Portu-gal, and Spain are set to get worse, not better.

Euro’s Fate: Three Sce-narios Given the root causes of the crisis from the structural perspective outlined above, there are only three possible scenarios for the Eurozone in resolving the crisis: (i) status quo and stagna-tion, (ii) breakup of the Eurozone, and (iii) debt restructuring and resetting the Eurozone. Status Quo and Stagnation In this scenario, the crisis countries stick to the restructuring and austerity programmes, suffer-ing from severe economic contrac-tion as a result. The German bloc

GEMS©GEMS©Chart 3. A nalytic Underpinnings of the Scenarios: Eurozone’s Structural Incompatibility

-4.7%

+3.0%

36%

9% 10%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2009 2010 * Germany France Italy

Germany’s real GDP grow th (* estimate)

2009 exports to BRIC as % of total (IM F Direction of Trade Statistics)

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countries continue to support the crisis countries financially to head off defaults and their resultant exit from the Eurozone. Governments in both crisis bloc and German bloc countries are assumed to be able to survive politically. Because of the single currency, the “real depreciation” of wages and prices will mean severe economic hardship in the crisis countries. Real GDP in Greece and in Ireland is currently con-tracting fast. Deflation is espe-cially damaging because debts automatically rise as prices fall, effectively nullifying crisis govern-ments’ efforts in paying-down debts through austerity pro-

grammes. Crisis countries will continue to call on the EFSF, which in turn means more de-mand for German financial support. These are potentially explosive political conditions affecting domestic politics in crisis countries and the German bloc countries alike. As domestic political pressures build, there is then a race against time: how quickly can the crisis countries return to some semblance of economic growth before the incumbent governments there are thrown out of office by increas-ingly alienated and angry voters? In Germany, the risk is also rising that taxpayers (who are also

voters) will turn against more bailouts of the crisis countries in increasingly larger numbers and in a more radical and vociferous way. If time permits (a big “if ”), the conditions in the Euro-zone which allow this scenario to gain traction and become more likely would include: (i) within the crisis countries austerity measures generally achieve their budget targets but result in very sluggish growth; (ii) spreads stay high and crisis countries’ banks continue to have difficulty in funding, yet crisis countries’ governments still manage to call upon the EFSF, even as foreign banks refuse to roll-over maturing debt; (iii) banks are supported by the ECB; (iv) even though unem-ployment continues to rise and welfare payments go up, (which in turn means additional austerity measures in order to maintain the budget deficit target), crisis country governments somehow manage to stay in office; and finally (v) the ECB is willing and able to engage in large-scale QE and depreciates the euro to help out the crisis countries, even as inflation begins to rise in the German bloc countries. 3 Most of these conditions are absent in the Eurozone today, making this scenario an increas-ingly implausible one. As men-tioned above, in the short to medium term, the structural incompatibility within the Euro-zone will get worse, not better.

3 German bloc countries competitive exports

notwithstanding, ECB’s unrelenting money printing in this

scenario will mean that the German bloc countries will be

wracked by rising inflation in the medium term.

The bottom line is that this status quo scenario, as much as it is the preferred way forward by the Eurocrats at the European Commission, does not resolve the structural incompatibility within the Eurozone. Breakup of the Eurozone The diametrically opposite position from the status quo and stagnation scenario is the Breakup of the Eurozone scenario. There are, in turn, two alternative ways in which this scenario may unfold, one led by the German bloc countries exiting the Eurozone and the other led by the crisis countries exiting the Eurozone. In the case of a German bloc exit, these countries take losses on their exposures to the crisis countries and recapitalise their banks but their future transfer costs are minimised. As a result, the crisis countries retain a massively depreciated euro which gradually restores competitiveness and eases the need for fiscal adjustment. In the alternative case of crisis countries exiting the euro, the situation is almost a mirror image of the German bloc exit alterna-tive, except that the German bloc countries now face a massive exchange rate shock as the euro appreciates strongly after the crisis countries’ exit. However in both cases the breakup of the single currency allows these structurally incompatible economies to adjust with more flexibility and, in the case of the crisis countries, they could re-negotiate their debts in a new currency (i.e. either in a greatly depreciated euro or their old currencies with exchange values re-assessed by the market).

“The Eurozone currently does not have any set mech-anism for member countries to leave the single currency zone, let alone for breaking it up.”



There is no doubt that this scenario involves huge financial uncertainty and disruption. The Eurozone currently does not have any set mechanism for member countries to leave the single currency zone, let alone for breaking it up. Banks and finan-cial institutions are especially at risk as anticipation of the breakup would lead to massive flows of euro-denominated deposits from banks in crisis countries to banks in the German bloc countries and to renegotiate loans by the crisis countries and discounting bank assets. This scenario therefore involves necessarily draconian capital controls in some forms. In the crisis countries exiting alterna-tive, the banking sector in these countries would have very sub-stantial net liabilities in euro – to banks in other countries, to bond-holders and to the ECB. The exiting crisis countries’ governments would almost certainly attempt to ensure that such liabilities were dischargeable in the new currencies, rather than in euro. What sanctions, by foreign courts or foreign govern-ments, in response to such at-tempts would be feasible is uncer-tain. Conditions that would make this scenario more likely include: (i) unemployment rising to over 30% in crisis countries, with entrenched deflation and budget deficits, which actually increase as tax collections collapse; (ii) spreads widen sharply and repeated heavy calls are made on the EFSF and the ECB’s balance sheet expands alarmingly as it engages in extensive and repeated

QE; (iii) even as the euro weakens further, inflation accelerates in the German bloc countries; (iv) political instability rises in both the German bloc and the crisis countries. Voters in crisis coun-tries might overwhelmingly reject budgetary austerity and voters in German bloc countries might reject high inflation and the continued, heavy lending to the crisis countries; (v) radicalised political oppositions in both German bloc and the crisis coun-tries gain popular support and start to win local elections. Given the huge uncertain-ty involved, this scenario presently remains a low probability and is a scenario that governments in both German bloc and crisis countries are naturally keen to avoid. However, there is a danger that some events occur outside of the direct control of the govern-ment which could trigger a chain reaction to tip the scale to bring about this scenario. One such event could be if the German Constitutional Court rules at some point that massive ECB QE is inconsistent with the contract Germany considered when it entered into when it ratifyed the Maastricht treaty. This would be sufficient to bring about a consti-tutional crisis in Germany, thereby starting a chain reaction to bring about the scenarios of German bloc countries exiting the euro. The breakup scenario does resolve the structural incompat-ibility within the Eurozone, albeit as an extreme solution.

Debt Restructuring and Reset-ting the Eurozone Significantly, the Irish bailout became inevitable in November 2010 after the German government started to make it clear that shareholders of banks would have to share the burden of debt restructuring, along with taxpayers. The market reacted with panic and the costs of debt to the crisis countries surged. The German government believes that once the markets factor the risk of losses into their calculations, borrowing costs would increase for member countries which are deemed to be less credit worthy, which will in turn would make these member countries change their spending behaviour. In other words, fiscal discipline will be enforced by the market more uniformly on all Eurozone mem-ber countries. The third scenario, and in my view the most likely one, is for the Eurozone to seek a solution to the crisis by simultaneously developing procedures for debt restructuring, while resetting the Eurozone in terms of how fiscal accounts are to be managed in member countries, hence the combination of debt restructuring and resetting the rules of how the Eurozone is managed. In this scenario, the political explosive issue of domestic politics is addressed simultaneously in the crisis countries and the German bloc countries, which gives this scenario the highest probability of eventuating.



Any discount on their current debt load would be welcomed by the crisis countries, especially if it can be worked out with due procedures, supported by the ECB and the IMF, making it easier for them to meet the fiscal budget targets. It would also make it easier for the crisis governments to retain the necessary support to stay in office and to stay in the Eurozone, now that the austerity programmes can be made less austere. From the point of view of the German bloc countries, debt restructuring is crucial for the governments to demonstrate to their voters that banks and their shareholders are sharing the costs of the crisis. With market disci-pline being brought to bear on regulating government borrowing, there is then a lower risk of other Eurozone member governments repeating the same mistake in the future. This argument becomes even more powerful when rules governing member countries’ management of their fiscal ac-counts are being reset, giving the ECB, for instance, more supervi-sory oversight with the ability to penalise errant member govern-ments. The big losers in this scenario are the banks and their shareholders. There is no question that the German bloc govern-ments will have to recapitalise the banks to avoid a collapse of their financial system. Banks in Ger-many, France, Austria and Italy have the highest exposure to the sovereign debts in the crisis countries (see the next section), and the resulting impacts of debt

restructuring could be very severe on the banking sector in Europe. Without recapitalisation, it is doubtful whether the banking sector in Europe as whole could survive. There are a number of significant leading indicators that suggest the European Commis-sion, led by the German bloc countries, is moving toward this scenario in their attempt to resolve the crisis. The intellectual ground work was prepared by a joint report submitted to the European Commission by six leading German economic think tanks in October last year, including the Munich-based Ifo Institute and the Institute for World Economy in Kiel, making the case for establishing insolvency procedures for debt restructuring. These are heavy weight research think tanks and highly influential in public policy debates. A consensus view from these six economic think tanks thus strengthened the German government’s position in moving in this direction. As if on cue in the third week of last October, Germany and France reached an agreement on the need to re-open the Lisbon Treaty – against opposition from the Eurocrats at the European Commission – to augment con-

trols over member governments’ fiscal spending, as well as estab-lishing procedures for debt re-structuring.4 While the details are yet to be worked out, with such a Franco-German accord the resetting of the Eurozone appears to be a certainty. This scenario of debt restructuring and resetting of the Eurozone offers a way forward with the best chance of resolving the region’s internal structural incompatibility without breaking up the single currency. Even in this scenario, economic growth within the crisis countries will be, at best, anemic for the next three years, if not longer. Government spending will continue to contract, though much less so than without debt restructuring. And there is no iron-clad guarantee that the incumbent governments in the crisis countries will survive politi-cally. So we cannot completely rule out political risks. However, if the Eurozone survives under this scenario, it will be a very different Eurozone in the future. After a sustained period of weakness, the euro could return to its pre-2008 level as German style fiscal disci-pline is gradually implemented throughout the Eurozone, with the ECB behaving increasingly

4 The Economist, October 23, 2010.

Table 1. Debt Dynamics of the Crisis CountriesRatio of Goods Exports to Gross External Debt Ratio, 2Q, 2010

Ratio of Interest Payment to Goods Exports Revenue if Cost of Debt is @ 6%

Portugal 9.6% 63.2%

Spain 11.1% 54.1%

Ireland 5.1% 117.6%

Greece 4.1% 146.3%

Italy 19.4% 30.9%

(World Bank)



like the Bundesbank. This future Eurozone would become a much more dynamic and competitive economic region once its internal structural incompatibility is steadily reduced. The bottom line is that at least some of the crisis countries are heading toward default. The only debate is when, and how, as captured by the three following scenarios. Table 1 illustrates how the debt dynamics, a combination of austerity (the collapse of tax revenues) and rising spread (the cost of rolling over debts) are setting up a downward spiral within these crisis countries. It also shows how the single currency has so far masked this debt dy-namic.

Imagine for a moment that these crisis countries had to service their foreign debts and pay for their imports with foreign currencies, rather than with the euro. The second column of the table shows the ratio of goods exports to gross external debt revenue, as of last summer, in the five crisis countries. The third column then shows the ratio of interest payment to goods export revenue if the average cost of funding the debt is 6%. At 6%, payment of interest alone would consume 117.6% of Ireland’s goods export revenue and 146.3% of Greece’s. In this case, not only would Ireland and Greece not be able to pay for any imports, but it would need more foreign borrow-ing just to roll over their debts.

As the market becomes more sceptical about the ability of these crisis countries to service their debts and about the viability of the euro itself, this debt dynam-ics is unmasked and comes under the spot light. Even though the crisis countries owe most of their debts to creditors within the Eurozone (see the next section) the is market now asking the previously unthinkable question; what if the debtors and creditors have to deal with each other in different currencies in the future, whatever these may be? As soon as such a question is raised, risk aversion regarding the crisis countries rises correspondingly, which in turn drives up the spread. A higher spread means more expensive debt servicing cost, and under conditions of

GEMS©GEMS©Chart 4. Debt Restructuring Combined w ith M ore German M onetary Discipline M eans the Fallout could be Contained in Europe

Exposure of Europe’s Banking System to PIIGS Countries as of end of June 2010 (US$ billion), estimated on “ultimate risk” basis1

Source: BIS

Greece Ireland Italy Portugal Spain Creditor Total

Austria 5.19 6.61 24.62 2.67 9.04 48.12

Belgium 3.68 32.61 32.03 6.05 20.06 94.43

France 71.13 50.27 480.13 42.10 199.78 843.40Germany 44.22 173.97 176.23 44.52 213.11 652.05Greece - 0.51 0.62 0.13 0.35 1.62

Ireland 8.04 - 41.98 5.09 28.65 83.76

Italy 6.77 16.49 - 6.48 29.85 59.59

Netherlands 11.33 25.93 59.28 12.24 99.47 208.25Portugal 11.72 18.70 4.94 - 27.34 62.70

Spain 1.15 12.27 39.25 84.71 - 137.38Sweden 0.98 3.89 3.20 0.45 4.75 13.26

Switzerland 4.22 19.43 18.74 3.52 15.27 61.18

UK 11.76 164.03 68.59 25.01 110.21 379.60US 13.61 60.64 53.63 5.21 62.24 195.32

Debtor Total 193.80 585.31 1003.24 238.19 820.12 2840.66Nominal GDP 330.78 227.78 2118.26 242.86 1464.04 4,368.72

1 The data cover contractual (immediate borrower) and ultimate risk lending by the head office and all its branches and subsidiaries on a worldwide consolidated basis, net of inter-office accounts. Reporting of lending in this way allocates claims to the bank entity that would bear the losses as a result of default by borrowers. To reflect the fact that banks’ country risk exposure can differ substantially from that of contractual lending due to the use of risk mitigants such as guarantees and collateral, reporting countries provide information on claims on an ultimate risk basis (ie contractual claims net of guarantees and collateral) since June 1999.

Memo: World GDP 2009 – USD57.9 trillion; EU GDP 2009 – USD16.5 trillion; eurozone GDP 2009 – USD16.5 trillion

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austerity and stagnant economic growth, the overall debt load gets bigger over time – the very mean-ing of a downward spiral. Is the Eurozone Crisis Containable? Can the Eurozone crisis be contained even if the debt restruc-turing and resetting of the Euro-zone scenario is to eventuate? Chart 4 below provides a partial answer. The banking sector’s exposure to the five crisis coun-tries is summarised with the data from June 2010. The banking sector in France has the highest exposure, followed by Germany, UK, the Netherlands, US, and Spain. It is by and large a picture of Europeans owing Europeans. As long as governments in France and the German bloc countries are prepared to act promptly to recapitalise the banks (and there is no reason to think why they would not) then the chances are, after an initial period of market panic, the situation would quickly stabilise and the likelihood of a global contagion would be re-mote. What does it mean for Asia?

How would the Eurozone crisis affect Asia in 2011 and beyond? Chart 5 shows some of the key Asian economies’ expo-sure to the Eurozone in terms of their exports. In 2009, for in-stance, exports to the Eurozone accounted for 11% of GDP in Singapore, 7% in Malaysia, 4.6% in Thailand, and 2% in Indonesia. Significantly, the export exposure

of the two regional giants – China and India – is quite a bit lower at 3.6% and 2% respectively. Given the expected weak-ness of the euro, it is therefore important to take account of the impact on Asia through the exchange rate channel. Chart 6 summarises the calculation of how much Asia’s exports to the Euro-zone could be reduced by a 1% depreciation of the euro against their currencies, in both the short term (within two quarters) and the medium term (within six quarters). The potential decline of

exports to the Eurozone as a result of a weakening euro is clearly more significant in the medium than the short term for all the Asian countries. Exports from India, China, Australia and Indo-nesia seem to be more sensitive to the euro’s exchange rate than some other Asian economies. Apart from the exchange rate channel, weak economic growth within the Eurozone itself would also hurt Asian exports. Chart 7 provides estimates of how much the potential impact on Asian exports may be through

GEMS©GEMS©

Chart 5 A sia’s Exposure to the Eurozone

11.0%

7.0%

2.0%

4.6%3.6%

2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Singapore M alaysia Indonesia Thailand China India

Column1

Exports to Eurozone as % of GDP, 2009 (Nomura Research)

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GEMS©GEMS©


13.2%

6.1%

15.6%

4.9% 4.5%5.3% 5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Australia China India Singapore M alaysia Indonesia Thailand

Column1

Impact on Asian exports to Eurozone from 1% change in Eurozone’s GDP (estimated from CEIC data)

GEMS©GEMS©


0.0%

0.7% 0.7%0.6% 0.6%

0.9%

0.7%

1.8% 1.8%

2.3%

1.3%

1.0%

1.7%

0.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


short term, within 2 quarters

medium term, within 6 quarters

Impact on Asian exports to Eurozone from 1% change in euro exchange value againstrespective Asian currencies (estimated from CEIC data)

GEMSSM

GEMS©GEMS©


13.2%

6.1%

15.6%

4.9% 4.5%5.3% 5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Column1




the GDP growth channel. It turns out that this channel is far more important than the exchange rate channel. A 1% decline in GDP growth in the Eurozone could cause a reduction of 15.6% of India’s exports to the region and 13.2% of Australia’s exports and 6.1% of China’s exports and so on. The importance of the GDP growth channel in affecting Asia’s exports to the Eurozone of-fers the clue, however, of a differ-ent perspective in examining how the Eurozone crisis may impact Asia. This is to focus on Germany, and to a lesser extent, the other German bloc countries. As shown earlier, in spite of the crisis, the German economy is growing at its fastest pace for 25 years, a result of its vastly improved efficiency and productivity, coupled with the weak (i.e. cheap) euro. As shown in Table 2, the German unem-ployment rate has been steadily dropping from 2009 through to 2010, even as the Eurozone crisis deepened and its consumer con-fidence index went from a deeply depressed reading of -33 in April 2009 to a buoyant +11 in Octo-ber 2010. German GDP growth is poised to outperform the rest of the Eurozone for 2011 and beyond.

A strong German econ-omy is the key pillar holding up Asia’s exports to the Eurozone. Table 3 shows that Germany’s imports from Asia went from 28% of total Eurozone’s Asian imports in 2007 to an estimated 30% in 2010 (France accounts for another 20%). The potential impact on Asia’s exports to the Eurozone is thus unlikely to be serious as long as GDP growth in the German bloc countries continues to be robust, even with France tread-ing water and the crisis countries stagnating.

There are three key conclu-sions to be drawn from this GEMS report. The first is that the most likely scenario for resolving the Eurozone crisis is a combination of debt restructuring, recapitalising the banks, and resetting conditions under which the future Eurozone will function; with much greater discretionary power given to the Bundesbank, aka the ECB. The second is that if managed correctly with the right policy combination, the Eurozone crisis is containable within Europe, avoiding a global contagion. The third is that as long as Germany’s robust economic growth continues to stay on track the potential impact on Asia’s exports to Europe would likely be mild.

Table 3. Germany’s Imports from Asia2007 2010

Germany’s imports from Asia/Pacific (including Australia & New Zealand) as a % of Eurozone total

28.1% 30.2%

(Eurostat)

Table 2. Germany’s Unemployment and Consumer Confidence

April 09 October 10

Unemployment Rate 8.3% 7.5%

Consumer Confidence Index -33 +11 (German Statistical Office & Institute for Economic Research [Ifo])

GEMS©GEMS©


13.2%

6.1%

15.6%

4.9% 4.5%5.3% 5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Column1


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GEMS©GEMS©


13.2%

6.1%

15.6%

4.9% 4.5%5.3% 5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Column1


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