EU industry grapples with Asian crisis

Date: 29/10/1998

By Chris Johnstone

A VILLAGE in the English Midlands made a name for itself at the time of the Black Death by isolating itself from all contact with the outside world when the disease appeared in its midst.

Although many of the villagers perished in the process, their self-sacrifice stopped the disease spreading further afield.

European leaders might well wish that a similar approach could provide an answer to contagion where financial markets are concerned. Unfortunately, sealing markets off or daubing a large dark cross on their door is not really an option in today's era of interlinked globalised trade as the world seeks to limit the impact of the Asian and Russian financial crises.

The EU's first reaction to the Asian crash was to ignore then downplay it, appearing to believe that a problem ignored is a problem solved. In its defence, the real seriousness and menace of the crisis only became apparent as the Union took its summer break in 1997, with Thailand, Malaysia and Indonesia following South Korea.

Ironically, the Russian financial crisis a year later also found most of Europe's decision-makers out of the office, away on holiday.

Throughout most of the autumn of 1997, Commission officials continued to insist there was no problem. Only months earlier, some of the same people had been chastising European industry for failing to take advantage of the opportunities offered by the Asian tigers.

However, dissident voices began to be heard both within the Commission and outside as the effects of the crisis became all too clear. Daimler Benz, which once numbered its car sales to South Korea in hundreds every month, reported that trade had dwindled to nothing.

Today, almost every part of EU industry from cosmetics to coiled steel has a disaster story to tell. European steelmakers now talk of a catastrophic situation this year, with cheap imports flooding in, leading to an almost unheard of deficit in the Union's steel trade.

The spate of recent profits warnings in all countries and across almost all sectors testifies to the grim outlook for industry, partly based on punctured expectations of growth and partly because of real fears of recession.

When it did admit there was a crisis, Europe's response was, and continues to be, somewhat unbalanced. It has taken a lead in pushing for the Asian countries to bolster the regulation of their financial markets, an issue which was sidelined in the 1980s' and early 1990s' dash for growth, and to open up their economies to more competition.

In this context, the Union is supporting calls for an overhaul of the world's financial architecture and moves to clamp down on banks' use of increasingly risky financial instruments, such as hedge funds, which can backfire seriously when the going gets rough.

However, Europe will have to perform an awkward balancing act in giving real help to the tamed, and now timid, tiger economies.

With no outside financial assistance, these economies will not recover and become lucrative markets for western goods once again. However, help for some sectors might only increase a flood of cheap exports into the EU.

The difficulty the Union faces in striking the right balance was highlighted by European shipbuilders' protests that some of the record International Monetary Fund (IMF) pay-out to Seoul was being used to help its giants dump cheap vessels on the international market.

Trade Commissioner Sir Leon Brittan has promised to investigate, but the Commission is a toothless watchdog when it comes to tackling cheap exports caused by currency devaluation.

Traditional trade protection instruments, such as anti-dumping duties, cannot be used to block goods which have merely become more competitive because of a fall in the value of their domestic currency. “Anti-dumping can only be used if the prices of the exported goods are lower than on the home market,” said a Commission official.

In this situation of relative helplessness, tensions are growing between the US and EU, the only two sizeable economies in a position to take in some of the world's excess production.

At last week's meeting between Brittan and US Trade Representative Charlene Barshefsky, the EU was forced to defend itself robustly against accusations that it was not doing enough to absorb imports from Asia. With the US and EU each looking to the other for answers, the crisis looks set to continue.