Asian and European crises
compared
Prof. Dr. Peter Mayer
Stevenspoint 2012
Dr. Peter Mayer
1
Asian crisis revisited
• 1997: Four Asian countries (Thailand,
Indonesia, Malaysia, South Korea) suddenly
faced serious economic problems.
• IMF came to the rescue and coordinated
reforms, provided funds and facilitated access
to finance
• After a two year period of reform and
adjustment, countries quickly return to
normal (high) growth rates.
Stevenspoint 2012
Dr. Peter Mayer
2
Growth rates of Asian economies
15
10
5
Korea
Indonesia
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Thailand
Malaysia
-5
-10
-15
Stevenspoint 2012
Dr. Peter Mayer
3
European crisis revisited
• 2008: The world financial crisis affected
virtually all European countries.
• The implosion of the housing bubble, the
rescue efforts for banks, the decline of
economic activity, and the stimulus measures
by governments led to a steep increase of
public debt. This resulted in a combination of
three crisis: of sovereign nations, of banks, of
growth, and finally the Euro.
• Five countries are particularly affected:
Greece, Ireland, Spain, Portugal, Italy
Stevenspoint 2012
Dr. Peter Mayer
4
Growth rates of key European economies
6
4
2
0
Greece
2007
2008
2009
2010
2011
Ireland
Spain
Portugal
-2
-4
-6
-8
Stevenspoint 2012
Dr. Peter Mayer
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Lesson 1: vulnerability
• Economists overlooked the various dimensions of
vulnerability. We have to have a more careful
and broader look at the risks involved.
• Public/private, short-term/long-term, maturity,
currency risks … In Korea and Ireland, it was
private debt, in Greece it is public debt, in Korea
it was debt denominated in foreign currency, in
Greece it was debt in domestic currency. In Spain
the problem is (partly) the term structure etc.
Stevenspoint 2012
Dr. Peter Mayer
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Lesson 2: stability in assessment
• The high volatility in assessing the strength of
national economies implies that caution is
advisable, for those in ministries of finance, in
banks and funds.
• Our understanding of economic mechanisms
and their interplay with political, social and
other factors is more limited than we thought.
Stevenspoint 2012
Dr. Peter Mayer
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Lesson 3: ability of governments to act
• The ability of government to react in a time of
crisis is key for solving the crisis
• This has various dimensions:
– Willingness of leadership to address challenge
– Ability of government to design and implement
reform
– National culture to deal with crises
– Political regime
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Dr. Peter Mayer
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Lesson 4: institutional mechanism for
dealing with crises need to be in place
• The specific trajectory of a crisis cannot be
predicted, but some plans, some preparation
of processes and procedures is necessary.
• The IMF was basically ready to work in Asia
• The complete lack of preparation of
emergency plans made things worse in the
case of Europe.
Stevenspoint 2012
Dr. Peter Mayer
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Lesson 5: Despite weaknesses – the
exchange rate is a powerful tool
• There are many good reasons to criticize the
volatility of foreign exchange markets and
their ability to come to sound assessments.
• But the big advantage of flexible exchange
rates is the force of thousands of investors
whose decisions bring about an adjustment
which politicians only rarely manage to bring
about.
Stevenspoint 2012
Dr. Peter Mayer
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Conclusion
• A study of the crises reveals some key lessons:
– Let us be more skeptical about market
assessments
– Politics, administrative capacity of states and
national culture matters
– Flexible exchange rates, despite weaknesses, have
an important virtue: they are not (or less)
restrained by political interests
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Dr. Peter Mayer
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