‘Potential danger’ to euro if crisis in Asia worsens

Date: 22/01/1998

By Mark Turner

THE launch of economic and monetary union could be dangerously compromised if the Asian financial crisis takes a serious turn for the worse, a senior European Commission official warned this week.

Peter Bekx, who is head of the unit which deals with international aspects of the euro, said that if the Japanese economy slid further and triggered off a world-wide cycle of currency devaluations, European monetary policy-makers could face a rough ride over the coming months.

"There is a significant danger of a vicious circle of competitive devaluations, financial instability, rising credit risks and declining growth," said Bekx, speaking at the European Institute for Asian Studies.

"Should negative growth be felt asymmetrically in Europe, it could cause problems for the management of exchange rates in the months before 1999."

His assessment is the strongest indication yet that the continuing Asian crisis is causing jitters in EU policy circles.

Although Bekx insists his analysis is based on pessimistic scenarios which are far from certain, or even probable, his remarks appear considerably less upbeat than recent pronouncements by Economics Commissioner Yves-Thibault de Silguy and EU finance ministers.

De Silguy asserted last week that the crisis would "have only a marginal impact on the economy and no impact on the launch of the euro".

German Finance Minister Theo Waigel was equally confident after a key meeting with his Union counterparts this week, saying: "We are equipped to handle the problems that result from this."

Bekx agrees that Europe is protected by sound macroeconomic fundamentals and financial sector health, and by the fact that two-way trade with Asia is low compared with intra-EU commerce. Even though EU exports are likely to fall and imports from Asia are likely to rise, the direct impact of the crisis should be small.

Neither, according to Bekx, is there a significant threat that Asia's troubles will have a disproportionate impact on EU member states, given the relatively low sums involved in the first place.

Also on the plus side, a Japanese collapse could provoke a flight to safety in European bonds - keeping interest rates down and stimulating growth - and overall there would be "downward pressure on inflation".

Nonetheless, Bekx warned that if Japan's economic plight worsened, both European and American policy-makers could come under increasing pressure to ease monetary policy, opening the door to a global chain of devaluations.

European equity markets would almost certainly react badly, competition for third-country markets would increase, and in the worst-case scenario, the Union and the rest of the world could "reconsider the benefits of free trade".

According to Bekx, a protracted weakness in the financial system could also "complicate the implementation of European monetary policy by the European Central Bank".

"All in all, we see a potential danger for the prospects of EMU, although this has not resulted yet," he said.

Financial analysts say that although these scenarios should be considered, they remain reasonably confident that Europe will escape relatively unscathed from Asia's woes.

International Monetary Fund managing director Michel Camdessus predicted during a visit to Brussels this week that the impact of the Asian crisis on the EU would be marginal.

Nonetheless, Bernard Wacquez, an analyst at the Organisation for Economic Cooperation and Development (OECD) said that he would need to revise "upwards" his forecasts of the effect of the turmoil on Europe this spring, suggesting current estimates might still be over optimistic.

Senior EU officials will meet in London to discuss the monetary implications of the crisis early next month.

Report of comments by Commission official Peter Bekx speaking at the European Institute for Asian Studies, January 1998.