Le blog du CEPII

Don’t let the Eurozone crisis go East

The eurozone crisis presents a risk for Asian economies. Mainly, the crisis could spread through trade and various financial channels.Yet, economic impact of spillovers is not the only reason why Asia has a specific interest in the survival of the euro.
By Asia-Europe Economic Forum
 Post, April 4, 2012

The euro could provide a good alternative to dollar in foreign exchange reserve holdings. The euro also holds the promise of a multipolar international monetary system revolving around the US dollar, the euro and the renminbi. The eurozone constitutes the most advanced experiment in regional cooperation. The idea of an Asian monetary cooperation gaining credibility, the crisis of the eurozone model will have implications for how Asian countries will shape their own integration.
Even though the stakes are high, Asia won’t help resolving the crisis until Europe proved to make credible efforts. The crisis is mainly one of governance. It highlights serious deficiencies in the monetary union’s structure. It points out the contradictions in the financial system. It also emphasizes the heterogeneous competitiveness inside the eurozone, resulting in major misalignments of real exchange-rate inside the region. Its correction might lead some European countries to leave the monetary union. The ECB played a leading role in dealing with the emergency, but its mandate limits the possibility of stronger interventions.

For historical and political reasons, Asia is cautious with Europe and will not intervene through bilateral help. Therefore, the emphasis has been put on a multilateral framework, in particular through the IMF. But other possibilities are conceivable: Asian banks could invest in European banks. Asia will expect some kind of compensation if helping with the crisis resolution: if using the IMF, the issue of IMF governance will inevitably need to be revisited sooner or later.

An additional form of assistance may be needed from Asia. Eurozone governments’ efforts to resolve the crisis may be impeded by the collapse of European growth. In a period of strong fiscal adjustment, growth in Europe is unlikely to come from domestic sources. Thus, foreign demand will be a key contribution to the successful of the Eurozone adjustment. This involves faster rebalancing of growth in China, but also further opening up of Asian markets.

There are many reasons why Asia and Europe should cooperate to fix the Eurozone. Unfortunately, the lack of proper institutional frameworks to host a regular dialogue between Asia and Europe prevents any form of cooperation. The Asian-Europe Economic Forum, bringing together experts from both the continents, could definitely play a role in bridging the gap and in providing a high level contribution to the discussions that must take place.

This post is a synthesis of La Lettre du CEPII n°318, « Don't Let the Eurozone Crisis go Eat », by Agnès Bénassy-Quéré, He Fan, Masahiro Kawai, Tae Joon Kim, Yung-Chul Park, Jean Pisani-Ferry, David Vines & Yu Yongding, janvier 2012. 
Europe  | Emerging Countries 
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