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Will the Mediterranean Economic Tsunami Take Over the Pacific Ocean?
Youn Sang-hyuk / Baek Seung-mi Reporter  |  ricky05r@uos.ac.kr / viorlate88@uos.ac.kr
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[0호] 승인 2010.06.03  
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As we hear about the current global financial crisis, we can see how it affected Korea with banks sinking, failed bailout plans, foreign investors leaving, currency exchange rates going up and down, and others such events. However, Korea has taken great reaction to the crisis and it is well recognized by many countries. Since our nation is on a sound status, is it ok to just stay relieved? Now, we need to move our eye on Europe. See how they are coping with Greece’s fiscal crisis and how it is going to affect Korea.

First let’s find out the reasons why Greece and other European countries are suffering from this economic crisis.

1) Greece¡?s Domestic Problem
Since the 1980s, Greece’s financial management has not been going well. Greece failed to satisfy the economic conditions to join the European Monetary Union (EMU) at first because the ratio of national debt to GDP was risen up to 123.7%(2009) from 22.3%(1980). However, the Greek government succeeded to become a member of the EMU by hiding its real scale of budget deficit and national debt by manipulating finance statistics. As a result of joining the EMU in 2001, the labor costs were increased and competitiveness in exports got weakened. This brought the rising of the account deficit. For example, Greece’s unit labor cost went up by 25.0% from 2000 to 2008, while Germany’s labor cost decreased by 0.2%.

2) Vulnerability of EU Governance
The authority of currency management in the EMU belongs to European Central Bank (ECB). However, the ECB doesn’t take the charge of the fiscal policy; it subjectively belongs to each member of nations. That is why EMU always runs the risk of asymmetric shock because of its financial diversity of each member of countries. Also the budget of EU is so small that it is hard to give a short-term fiscal aid to unexpected asymmetric shocked country immediately. Furthermore, the policy of ECB indicates that it can’t support its member of countries in the same way as the IMF, because according to the treaty of Lisbon under Article 125, EU is prohibited to reduce a member nations’ debt.

3) Germany¡?s Passive Action
To help a country which is in a severe financial situation as in this case, it is essential that major countries such as Germany or France to help. Due to not having centralized government in EU, European council has taken over discussing the Greece problem. The problem is that most member of countries were not willing to help Greece. However, they want the euro currency to be stable. As a result, each country can’t co-operate with each other. Germany which is considered to have one of the greatest economic power has not broken in the situation because of domestic political issues and the public opinion. This is why 6 monthes after the crisis, the EU just started to give aid to Greece and it needed also help of the IMF.


Korea, Exemplarily Solving the Global Economic Crisis

Even until last year, it was hard for Korea to reach 5% in economic growth. But this year is different. It has recorded a 7.8% growth rate for the first quarter and also the second quarter seems optimistic. Major indicators like production, exportation, and domestic demand are showing an increased growth.

That is why the Korea Development Institute (KDI) has elevated its forecast of Korean economic growth rate from 5.5% to 5.9%. As well, the Samsung Economic Research Institute (SERI) and LG raised their forecast of the economic growth rate.

Many experts have predicted a positive view on the rapid recovery of the domestic economy. They evaluated that productivity in most industries will increase, except shipbuilding and construction. Also, the rate of operations in small and medium sized businesses, as well as major companies, has been recovered to the previous state before the Lehman Brothers bankruptcy. Furthermore, the number of employees in April increased by 150,000 and it is the biggest number since last June.

Last year, Korea had been chosen as an exemplary country which recovered fastest from the global economic crisis among the OECD. Moreover, in April, the international credit ratings agency, Moody’s, has raised South Korea’s sovereign credit rate by 2 levels from A2 to A1 and it is the highest level since the financial crisis in Korea 12 years ago. Moody’s said that the increase of exportation and domestic demand in Korea, in addition to the fact that both public and private enterprises have contributed to the economic growth led to the advancement of the Korean sovereign credit rate.

Korea has grabbed attention from the Wall Street which is well known for the center of world financial markets. Main investment banks in the US have measured Korean economy as showing a solid upward trend. Moreover, many of the world’s media and international organizations have highly appreciated Korea’s economic recovery. Yoon Jeong-hyun, the minister of Ministry of Strategy and Finance, thinks Korea’s national prestige is soaring in the international community. He said, “I could feel that many countries consider Korea as an exemplary recovered country when I attended international meetings.” Korea is holding G-20 Summit this year, and a Nuclear Security Summit in 2012. Furthermore, it is the first non-European country to be appointed as the next chairman country of European Bank for Reconstruction and Development (EBRD).

Samsung Economic Research Institute (SERI) says the reason why Korea is recovering faster than other countries is because it has a relatively fine financial prudence compared to other developed countries. “The fact that the rising nations’ rapid economic growth like in China led to surprise increase of Korea’s export also contributed to our robust recovery,” SERI added. Many economic experts think Korea’s competitiveness in exports is one of the main causes of improving economy and it owes it to Korean enterprises’ steady product quality control and high exchange rate of won.


How the Economic Crisis in Europe will affect Korea?

The situation of the world economy seemed to be recovering very rapidly, but now it is faltering with the fiscal crisis in Greece. It seems that Korea which was showing a large reliance upon foreign countries’ economies is in an uneasy situation because the crisis in Greece may also affect Korea. It has already affected many developed countries like Spain, Portugal, and even the US.

Government and economic experts expect that the effect which Korea may feel from the fiscal crisis in Europe will not be the worst disaster. However, they say that Korea will have to be prepared for an emergency situation if the problem in Greece expands to other countries.

The Wall Street Journal (WSJ), one of the most influential economic newspapers in the world, has expressed their view on Europe’s fiscal crisis. They suggest that it will have a serious effect on the US economy, citing the collapse of the housing market in the US in 2008 which subsequently had an effect on the European countries. So many business men are aware that solutions to the fiscal crisis are urgently needed before it gets to be an even larger problem in the US.

Since it is quite obvious that the US will be affected negatively by the crisis in Europe, then how is it going to affect Korea? Let’s take a look into some views about the potential problems that Korea may experience.

Optimistic View on the Effect of the Europe¡?s Fiscal Crisis
The Ministry of Strategy and Finance has presented their view about the effect that Europe’s fiscal crisis will to have in Korea. It said, because the amount of investment of Korea in Europe is only 2% of the whole investment in foreign countries, the fiscal crisis will not be a disaster for the Korean economy.

The economic policy general manager in the Ministry of Strategy and Finance, Yoon Jong-won, discussed his opinion about the crisis in an interview with Yonhap News. He stated that just like investment in Europe, the amount of imports from Europe is also small, only 10%, so it will probably just turn out to have a small impact on Korea. He also has ensured that the current crisis in Europe will not turn into the 2nd Global financial crisis citing an opinion of the IMF that considered the attitude of the US to this crisis as an overreaction. “Since the financial market in Europe is in a disastrous situation, we always need to be aware of the worst possible circumstances, but considering the relations between Korea and Europe, Korea will be less affected by the European crisis.” General Manager Yoon added.

This optimistic view on the effect of the crisis is based on the present exportation which seems to be on the right track. The exportation to the European Union (EU) countries increased by 14.1% from last year’s figures. This increased rate is not larger than 24.8% in other developed countries because the speed of recovery in European countries is relatively low. However, the government sees this situation optimistically because the rate of exportation to Europe is still increasing regardless of the economic situation. And, some people even consider this problem as being restricted to only few countries in Europe unlike the Lehman Brothers’ financial crisis case that occurred in the US.

Pessimistic View on the Effect of the Europe¡?s Fiscal Crisis
The countries of Portugal, Italy, Greece, and Spain which are humorously depicted as PIGS seem to be under a serious economic crisis. Considering even rich countries like Spain and Italy felt the disastrous effect from Greek crisis, this effect will not end within Europe boundary. This situation could mean there will be a big inflation in Korea according to a soaring exchange rate for won to dollar because people will prefer safer assets like the US dollar and gold as current circumstances in Europe are very unstable.

If the fiscal crisis in Europe will be solved in a short span of time, nobody would worry about the fiscal crisis’s effect. But now there are negative views on the crisis which are prevalent among the economic experts. They think that those countries in Europe are in danger of consumption greatly shrinking in Europe before the economy gets back on track. And the shrink in consumption would lead to a vicious circle, just like the shrink in demand which led to the Great Depression in the US.

So the people who are having negative views are guessing that the economic peril in Europe will not be solved soon and this will consequently have a terrible effect on Korea’s export to other countries. Many economic experts also think that the persisting depression in Europe will make the exchange rate of Korean money devalued and it will give a burden of higher prices due to soaring price of raw materials to consumers in Korea.

How Should Korea Take the Next Step?

The government admits that even though Korea’s economy is getting much better, we still have some dangerous factors that make us anxious because we are extremely reliant on other countries. Korea’s level of dependence to foreign economies was 82% in 2009 and it is almost 3 times bigger than Japan’s 30% and even much bigger than China’s 58%.

“Insecurity in the international financial market still remains. For instance, soaring oil and raw material prices, Europe’s fiscal crisis, and developed countries’ policy switch can put us into downturn no matter how well our economy is.” Saying this, Minister Yoon emphasized that we always need to be aware of emergency situations. The government proclaimed that it is going to keep its current policy keynote in order to maintain an economic upturn and it will establish an economic fountain based on the private sector so our economy can be more efficient.

Seeing that the recent fiscal crisis in Greece which had been fine temporarily and then deteriorated again, we can learn that there always will be a somewhat instability in the global markets. Therefore, rather than being relieved from the global economic crisis, we always need to be ready for every chance that will protect us from an unstable future.

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