Economists and politicians around the world are likening the European credit crunch to the Asian economic crisis of 1997. The failure of European financial ministers to come to a common solution over the crisis last weekend, has prompted economic historians to find many similarities between the disunity in present day European economies and the Asian economies of 1997. Will we ever learn from mistakes made in the past?

The Financial Times reported - Joseph Stiglitz, the Nobel prize- winning economist, once compared the south-east Asian economies to Spain’s “invincible” Armada: a proud array of ships that, when hit by storms, sank because there was no co-ordination among them. Jean-Claude Trichet, European Central Bank president, warned that European disunity was threatening a similar disaster when he lamented: “We are not a political federation . . . we do not have a federal budget.” We now enter a phase that Asia went through, indeed a defining feature of major financial crises: a collapsing deck of cards brings down businesses that had looked robust only moments before. The threat today extends to European banks, savers and, above all, the euro.

Europe’s deepening credit crisis is forcing companies to reduce investments, cut losses and payrolls. Hinting that this was only the tip of the iceberg, Bloomberg reported that company investment in Europe, which plunged 1.2 percent in the second quarter, won’t increase again until the third quarter of 2009, Credit Suisse has forecast. As investment is reined in, unemployment lines will lengthen, further eroding consumer expenditure that’s already fallen in the last two quarters.

The Financial Times continues to draw several threads from the Asian crisis, all running parallel Europe’s sullen economy. Commenting at the financial ministers meeting European leaders declared that they could not help each other, with Angela Merkel, the German chancellor, leading the charge. This reminded some observers of the comments made by Ryutaro Hashimoto, the Japanese prime minister, at an emergency summit convened in December 1997 to discuss the Asian financial crisis: “Japan cannot save Asia, it can only save itself”.

Similarly, in recent weeks, one has heard the swish of dollar credit lines being pulled back from Europe – and from many emerging economies. In 1997, the spark for the Asian crisis was the sudden recall of short-term, yen-denominated loans by Japan, which generated a panic outflow from most of Asia and the collapse of local currencies.

This entry was posted on Monday, October 13th, 2008 at 10:31 am and is filed under Government, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.