Europe in the World

EU-Asia Dialogue


Paths through the crisis: Can enhanced financial integration provide the way forward for Asia and Europe?

2 December 2011


Harmonious globalisation, regional isolation or global meltdown: these were the three possible future scenarios for the world economy cited by Ronan Lenihan, a project executive at the Asia Europe Foundation.

The eurozone crisis, the rise of Asia, changing demographics, the quest for sustainability, regional demand for goods, political legitimacy, and the changing international monetary system will all be major drivers of global economic and social development between now and 2030, Lenihan predicted.

He believes the ‘harmonious globalisation’ scenario of equal global growth and a balanced G20 is little more than “blue-sky thinking”. But neither is it inevitable that meltdown will lead to a “lost decade” characterised by short-term protectionist, nationalistic policies, he argued.

“Option two is more realistic: regions will try to drive growth locally, leading to protectionism and competition between regions,” the analyst predicted.

He cited resolving the euro crisis, providing an effective link between finance and the real economy, closing regulatory gaps at global, regional and national level, and “internationalising” China’s currency among the most pressing issues for decision-makers to address.

China is not the Far East. The Chinese see it as ‘the Middle Kingdom’: at the centre of the world, said Dr. Liming Wang, director of the Confucius Institute for Ireland at University College, Dublin, adopting an historical view to put China’s impact on the global economy into perspective.

According to 2010 figures, China is the world’s second-biggest economy by GDP and also ranks second in international trade terms. It has the world’s largest foreign exchange reserves and was the number one contributor to GDP growth last year.

“China is the driving force of the world economy. But it is only 94th in terms of GDP per capita. It’s a massive economy with millions of poor people,” Dr. Wang explained.

He cited IMF projections predicting that “the end of the Age of America” would come in 2016, when the two giants’ ratios of GDP to purchasing power parity aligned with one another.

Nevertheless, China is facing enormous problems: Dr. Wang expressed doubt as to whether it would be able to maintain its impressive performance in the long run without changing its growth model.

The seriousness of the eurozone crisis is being exacerbated by a lack of political vision and a strategic failure to nurture a reserve currency, according to Dr. John Ryan, a research fellow at the Centre for International Studies at the London School of Economics and Political Science (LSE).   

Ryan outlined four possible scenarios for the euro zone’s future:

1.       A breakup of the euro zone or a change in its composition.

2.       Default and restructuring.

3.       Fiscal union.

4.       Making the European Central Bank a lender of last resort.

 “Everyone expects economic growth to be low in the EU next year. We might even see a double-dip recession,” warned Dr. Zsolt Darvas, a resident scholar at think-tank Bruegel.

“This is a very serious problem, because without growth it will be very difficult to solve the eurozone crisis. Growth increases stability and boosts household incomes,” he said.

In the absence of growth, banks’ credit situation isn’t going to get any healthier, which means that they will continue to be reluctant to lend to the real economy, Darvas further warned. The knock-on effect of this will be even less growth and a dearth of credit, he said.

Talk of “the rise of China“ is misplaced: China is simply returning to its traditional place in the world economy, argued Marjan Svetličič, head of the Centre for International Relations at the University of Ljubljana.

“Eurocentric and Western points of view often come across as arrogant. We need a cultural shift: bring to an end Western-centric views,” Svetličič urged.

Despite China’s phenomenal recent economic growth, Svetličič warned that some forecasts were pessimistic. “It’s hard to imagine that the US economy will continue to be the engine of growth for China indefinitely,” he said.

“China – together with India, Indonesia and other countries in the region – can continue to be an engine of global growth in the long term. But China can’t continue alone forever with its current model,” he cautioned.

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