The European debt crisis: implications for Asia and the Pacific

Asia-Pacific economies are increasingly concerned about the impact of the public debt crisis in a number of European economies. In recent months, the scale of public debt in Greece in particular, but also in Ireland, Portugal and Spain, has led to credit downgrades and increases in the debt servicing costs of those countries. In response, their Governments have pledged to close their fiscal deficits and decrease their levels of debt in the coming years through stringent programmes of budget cuts, as affirmed recently by the G-20.1 Further compounding the fiscal gap are ageing societies and decades-old weak economic growth which will require additional resources as well as leading to declining tax proceeds. Consequently, the global financial markets have yet to be convinced that the affected countries will be able to reduce budget deficits sufficiently to lower public debt to the level required. The worst-case scenario of sovereign debt defaults in one or more European countries at some point remains a concern. For Asia-Pacific economies, two questions arise: (a) To what degree will these difficulties translate into reduced growth prospects as the region continues its V-shaped recovery from the global economic crisis? While some impact on Asia-Pacific is inevitable given the global linkages of economies in this region, it is important to establish whether the impact will be restricted to a limited moderating of their otherwise robust ongoing recovery, or whether the impact will threaten a downturn in Asia-Pacific akin to a double-dip recession; (b) As the crisis has exposed policy tensions inherent to the European integration process, how will the Asia-Pacific region evolve its exchange rate and fiscal policy coordination?