Abstract
The European sovereign debt crisis erupted a dozen years after the Asian financial crisis of 1997–1998. What is striking are the similarities between the European crisis and the Asian crisis. The case of Greece even bears resemblance to earlier Latin American crises. Why did Europe not draw lessons from history? What can the authorities in Asia learn from the European crisis, so that they too will not ignore the lessons from other countries? This chapter reviews the lessons from the Asian crisis, provides a broad sketch of developments of the euro-zone crisis and considers how Europe could or should have learned from the Asian crisis. It also selectively highlights important lessons for Asia that are emerging from the current crisis in the euro zone.
I am grateful to Professor Masao Kumamoto who served as a discussant for my presentation in conferences, as well as conference participants for their valuable comments. At the time of writing (mid-June 2012), the euro zone crisis was still fluid and evolving, and developments may supersede some of the observations made in this essay.
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- 1.
Sheng (2009) provides a vivid account and thoughtful analysis from the viewpoint of a policymaker involved in the crisis.
- 2.
Radelet and Sachs (1998).
- 3.
IMF, Independent Evaluation Office (2003).
- 4.
See, for example, Lane et al. (1999).
- 5.
See, for example, “Statement of the IMF Staff: Principles Underlying the Guidelines on Conditionality” (Revised January 9, 2006), paragraphs 6 and 7.
- 6.
Basel Committee on Banking Supervision (1999).
- 7.
The first IMF program for Thailand was supported by bilateral support from seven Asian countries and Australia, while Europe and United States did not offer any co-financing.
- 8.
Ogawa and Ito (2000) provide an early example of the ACU proposal.
- 9.
A list of measures taken is provided in “Table 1.2. Capital Flow Management Measures in Asian Economies”, IMF (2011a, p. 18).
- 10.
IMF, GFSR (April 2008).
- 11.
See, for example, “Italy’s Economy: That Sinking Feeling” The Economist, November 12, 2011 issue, p. 30.
- 12.
This is in contrast to a country that is not facing immediate pressures on sovereign debt, where fiscal policies may aim to restore stability in the long-run through the introduction of credible medium-term fiscal consolidation plans, while using active fiscal policy in the short-run to support demand.
- 13.
The Asian crisis can be viewed as an external sovereign crisis, and the euro zone crisis may also be thought as a balance of payments crisis for peripheral sovereigns.
- 14.
Committee for the Study of Economic and Monetary Union (1989), Subsection 30.
- 15.
A major difficulty is how to distinguish a solvent sovereign, as without the ability to seize assets from the sovereign, long-term solvency relates to the willingness more than the ability to repay out of uncertain future revenue streams. Moreover, in the short-term, much of the repayment ability is based on the ability to refinance existing debt, which in turn is determined by the willingness of investors to hold debt. That critically relies on sentiment, which in turn is influenced strongly by the availability of a strong enough safety net that can step in in times of stress.
- 16.
As argued, for example, by Summers (2000).
- 17.
For a discussion on the extent to which Asia fulfills the conditions for an optimal currency area, see Kawai (2008).
- 18.
The swap agreements, which were expanded in October 2011 for a limited period, are comprised of USD 40 billion in dollar-won and USD 30 billion in a yen-won swap with Japan, and a USD 57 billion yuan-won swap with China. The yen-won swap between the central banks is aimed to be used for “stabilizing regional financial markets through supplying short-term liquidity” in a “non-crisis situation”, while for China the two sides have agreed “to explore the possibility and extent of converting swap currencies into reserve currencies.” (Quotations from central bank press releases).
- 19.
In May 2012, the ASEAN+3 Finance Ministers and Central Bank Governors announced their intention to strengthen CMIM through, inter alia, doubling its resources, increasing the limit for non-IMF linked access, and introducing a precautionary facility.
- 20.
As holdings by foreigners are not confined to regional investors, we cannot assume that these holdings represent investments of regional savings. Indeed, available data suggest that 90% of portfolio investment in Asia comes from non-regional sources (IMF 2011b, Fig. 4.1). Moreover, unlike euro-denominated bonds within the euro zone, it is not clear that even holdings by regional investors benefit from a ‘home bias’ that would make them more stable.
- 21.
The G20 Action Plan to support the Development of Local Currency Bond Market, published on October 15, 2011, also cautions of possible instability from local bond markets unless supported by a strong domestic investor base and robust institutional and regulatory framework (paragraph 6 of the report).
- 22.
Coulibaly et al. (2011).
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Ariyoshi, A. (2013). Lessons Learned, Lessons Not Learned and the Lessons to Be Learned: From the Asian Crisis to the European Crises. In: Kaji, S., Ogawa, E. (eds) Who Will Provide the Next Financial Model?. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54282-7_9
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