Summer Davos in Asia 2012 - European debt crisis on global economy

(In an interview with the official media of Summer Davos in Asia 2012, Prof. Zhu Ning, Deputy Director of SAIF, shared his opinion on the impact of European debt crisis on global economy.)

There are several major takeaways from this session.

The first is the global reach of the euro crisis. Even though European countries are obviously the ones who suffer the most from the financial crisis, other countries are closely involved. If the GDP growth of Europe were to stall to 0%, according to Min Zhu, the US GDP growth would slow down by 1.5%-2% and that of China would slow down by 1%-1.5%. So, even though other countries may not feel as much pain as European countries do, they should try to work together with European counties to solve the euro crisis problem.

The second is that European countries have been making considerable progress towards solving the problem. European leaders realize the severity of the euro crisis and have been trying hard to convince international organizations that time is needed to solve the long-term euro crisis. For example, the prime minister of Denmark pointed out that European cultural heritage makes it such that Europeans may not do things as fast as many outsiders wish, especially given that the EU is not a sovereign country but a strategic alliance. Therefore, the global community and investors should have greater confidence in Europe and “come to, trade with, and invest more in Europe”.

The ex-president of Mexico emphasized that, [based on] his own experience in handling the Latin American debt crisis, it is better that European countries solve their problems sooner rather than later. Also, he argued that Germany should be more cooperative in the process because it is in its own interest and that of the rest of the world.

The third is that the speed of the reform may not be as fast as some countries wish and the long-term solution to the euro crisis rests in long-term structural reform. Such structural reforms may take a long time to engage and the outcome remains unclear at the moment. The consequence of such long-term structural reform is important to the future growth of European countries. Such structural reform includes but is not limited to reform in the fiscal system, banking system and regulatory framework.

More than that, several panelists mentioned that fundamental changes in the productivity of European countries, especially in bridging gaps between core and non-core countries, is critical to the health of the European economy. The convergence of productivity between Northern and Southern European countries can ensure the integrity of the eurozone and euro in the long run.

The most important takeaway from the session is the global nature of the crisis and the direction into which the problem is headed. Several panelists mentioned that they think Europe is moving into a stage where [it is reaching] a higher level of unity. During this process, the European countries and the rest of the world will work more closely than ever before to solve the euro crisis.

Finally, the world should not let the euro crisis distract its attention away from addressing other important issues and uncertainties, such as the US fiscal cliff, the slowing of economic growth in emerging markets and strategic food security and safety problems.