European Aftershock

No Need for Panic but Reason for Emergency Footing

The financial trouble brewing anew in some European countries is a somber reminder of how fragile and nascent global recovery is. And the jitters in the domestic markets last week showed ― once again ― Korean officials should not be bragging about an early escape before correcting structural problems that make the economy unduly vulnerable to external shocks.

Escalating debt fears in Greece, Portugal, Ireland, Italy and Spain are unlikely to throw the world back into the crisis of 2008, as Germany and France will come to the rescue of their weaker EU links.

The European crisis comes at a time when Korea's major economic indicators, including growth rate, trade account and inflation, are showing signs of weakness, and on top of already rising concerns among the domestic analysts about the ``G2'' risks of financial regulations in the United States and monetary stringency in China.

Fortunately, the Bank of Korea says there will be no need for panic: President Obama's regulations on the banking industry will be sharply watered down by the time they become law ― if they do ― while Beijing's financial stringency won't reach a stage that freezes the growth of its real economy.

Still, the central bank's reassurance should be no reason for complacency for Korean policymakers. If the European sovereign risks remain unsolved for too long, they will drastically slow down global recovery, dealing a blow to this export-driven economy. Financially, even the brief specter of default in Greece alone pulled down the Korean won as nothing has done over the past several months.

Korean financial officials may say ― and think ― the nation's external liabilities still remain at a sound level, but when they include debts of quasi-governmental organizations and state enterprises, Korea's debt ratio easily approaches the average of the 30 richest countries, meaning Seoul should be closely watching its fiscal stability.

Most worrisome is the Lee Myung-bak administration's reckless ambition to turn the global financial crisis into an opportunity for Korea's emergence as a financial powerhouse, which is not just running counter to global trends but is hardly possible without entailing huge risks.

The Korean policymakers should remember it was not the nation's foreign reserves of $260 billion but its currency swap with the United States that saved this country from falling back to the 1997 nightmare of a currency crisis in 2008. Nevertheless, they have since done little to reduce Seoul's vulnerability to overseas financial turmoil by, for instance, coming up with a safety device to better control the monetary flows in and out of the country.

As seen by the recent controversy over the KB Financial Group, the financial authorities here still cannot tell prudential regulations from anachronistic government-dictated financial operations. Until when should Koreans remain nervous about human disasters that are caused by policymakers who are far more ambitious than competent?