'It might become inevitable' for Greece to quit Euro currency
Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), shares her thoughts about Europe's debt crisis and its impacts to the global economy, money markets and Thailand.
What are the keys to the escalating sovereign debt crisis in the euro zone? And why do we need to keep a very close watch on it?
“One key point is that the entire thing is a structural problem and there has to be a structural change to end the crisis. We expect that Greece may need to exit the euro due to its lack of competitiveness. It’s just a question of how and when. And if that happens, how to handle the damage and risk of contagion, that would be an issue,” Usara said recently.
Certainly, the global economy will face more serious threats to growth and markets once the exit occurs.
In the wake of the political chaos in Greece and political uncertainty in other euro countries, European leaders were pondering the possibility of debt-ridden Greece ditching the euro and returning to the drachma, which was the nation’s currency before it switched over to the euro in early 2002.
The Greek problem is at the heart of competitiveness as the single European currency, the euro, does not fit all euro-zone members.
“The euro is too strong for a small country with lower competitiveness and higher production costs than other countries in the area. When it has to sell [low-value-added] products at high prices, it is unable to sell,” she said.
There might be no other way for Greece to restore its competitiveness but devaluation, which means leaving the euro and returning to the drachma, which could depreciate to the point where its exports become more competitive.
If Greece’s exit happens in an orderly manner with the euro-zone member countries’ legal support, the global economy and money markets would likely suffer, but to a lesser extent, Usara said.
However, if Greece’s departure from the euro transpires in a disorderly manner, without legal backup, that could adversely affect the world economy, shake money markets and rattle confidence in the area, she said.
Worse still, some euro-zone countries, like Greece, France and Germany, have had elections and changes in leadership during this period. This could create policy uncertainty, leading to complications to the crisis’ resolution.
“Now, it’s not just a matter of a Greece’s exit. It’s all about how European leaders and policy-makers limit the damage and curb contagion risks. The behaviour of depositors is uncontrollable,” Usara said. Measures to boost liquidity may be also required to help the rest of the euro-zone to survive.
Spain would be at a high risk from this worsening crisis as the country has problems of non-performing loans and property bubbles.
Look at Thailand where many are optimistic about its economy after a better-than-expected recovery in the first quarter of this year from last year’s devastating floods, she said.
Usara expects not much of a direct spill over from the euro-zone crisis as Thailand’s exports to the area account for only 10-12 per cent of its total exports.
However, indirect impact could be felt due to the likely slowdown in derived demand for Thai exports to China. China, which exports largely to sinking Europe and sluggish United States, is Thailand’s largest trade partner. China’s exports would likely be adversely affected and Thai exports might not be as good as they usually are, Usara said. Thailand’s tourism industry could also wobble from fewer European tourists, and massive market volatility is expected on concerns over the global economic slowdown.
“There is no question about Thailand’s recovery after the floods but there may be one about the recovery’s speed. The downside risk to growth may be shifting from capacity constraints from last year’s floods to weaker external demand,” she said.
Standard Chartered has maintained its forecast for Thailand's economic growth this year at 3.5 per cent as its exports could be hit by weaker external demand.
“Thailand may need to adjust its strategy to have higher exports to Asia as compensation for the European slowdown for many years to come,” she said.
There is some good news amid the gloomy global economic outlook. Thailand’s inflationary pressures may ease if the drop in oil prices continues along with the weakening in worldwide demand.
The Thai central bank is expected to keep the policy rate unchanged at 3 per cent for the rest of this year, Usara said.
“It may be too soon for rate rises. And the market may turn to think about a rate cut if the situation in Europe gets much worse,” she added.
