Eurozone crisis and Korea
Government should not be complacent
The gloom created by the eurozone crisis in the aftermath of Greece’s general election looms large around the world.
Greece is now teetering on the brink of default as the country’s political parties failed to form a coalition government owing to different views on austerity measures imposed in return for an emergency bailout. They agreed to hold a new election on June 17 but whether Greece will honor its earlier commitments is unclear because the Coalition of the Radical Left, or Syriza, which opposes the loan agreement with international lenders, is most likely to take power in the new poll.
Most recently, the European Central Bank (ECB) has reportedly halted its provision of liquidity to some Greek banks, raising concerns that the country may have to exit the euro. Greek President Karolos Papoulias said about $900 million was withdrawn from Greek banks on Monday alone.
The global financial markets have taken a direct hit from the escalating debt crisis in Europe. World stocks remained low as a whole and the euro hit a four-month low Wednesday. U.S. stocks gave up early gains on positive U.S. economic data to sink lower the same day.
Seoul’s financial markets also dipped Wednesday, weighed down by the mounting eurozone crisis. The KOSPI nosedived more than 3 percent from the previous day to barely hold the 1,840 mark. The Korean won finished at 1,165 won to the U.S. dollar, down 11.6 won from Tuesday’s close. The panic eased a bit Thursday but investors are wary of developments in Europe.
Europe’s latest debt woes have put Korea on alert as the crisis may spread to other bigger European countries such as Italy and Spain. Local policymakers are playing down the shock from Greece, saying Korea’s economic fundamentals remain strong despite global market uncertainties.
Vice Minister of Strategy and Finance Shin Je-yoon told an economic review meeting that the Korean economy has been mostly unscathed so far although there are downside risks. ``We have sufficient foreign exchange reserves and don’t see any problem in securing liquidity. There is no need to overreact to the developments in Europe,’’ Shin was quoted as saying.
Nonetheless, there is no room for complacency. The fact that Korea’s exports to the eurozone during the first four months of this year dived 18 percent from a year earlier is clearly a warning signal to its economy. Furthermore, the economic slowdown in China, Korea’s largest trading partner, must be a double whammy.
We urge our policymakers to keep a close watch on capital flows, especially European funds, so we can act preemptively to secure liquidity abroad and prevent credit crunches domestically.
Last but not least, the government should pay keen attention to economic growth. As things stand now, the central bank’s growth projection of 3.5 percent for this year appears unachievable. In this case, the government will have to seek ways to stimulate the economy artificially.