European Commissioner for Economic and Monetary
Expanding Asia: unprecedented opportunities and new global challenges
Brussels, 10 March 2008
President Kuroda, Ladies and Gentlemen,
It gives me great pleasure to offer the closing words to what, I am told, has been a successful conference. I would like to thank all those speakers and participants whose efforts have contributed to a stimulating and fruitful day of discussion. I am grateful that President Kuroda has been able to join us today, for this first event organised in the context of the recently launched ASEM Dialogue Facility.
A new such conference will also take place in Korea this June during the next meeting of the ASEM Finance Ministers, co-organised with the EU Slovenian Presidency and the Korean Ministry of Finance. This is a clear sign that cooperation between the EU and our ASEM partners continues to grow ever stronger.
10 years ago East Asia was dealing with the most serious financial crisis to hit the region since the end of the Second World War. And yet who would have predicted then that Asia would bounce back so spectacularly – to become once again the centre of global economic dynamism?
In light of this impressive progress, I would like to start with some remarks about the economic development of the East Asia region – the enormous gains but also the challenges we face as Asia expands its influence in the global economy. I will finish with a few words on the 10th anniversary of the euro and what the future holds for EMU.
East Asia has accomplished economic revolution on a breathtaking scale, outpacing world growth for over 50 years. In South Asia too, growth has exceeded 5% a year on average since 1996 –excluding Pakistan which only began this trend in the year 2000.
And despite the current financial crisis and soaring oil prices, Asian economies continue to expand at a solid pace. Growth will only moderate slightly this year to around 8.4%. Asia has shown a very welcome resilience to the turbulence, though clearly the region is not immune from shocks coming from more advanced economies particularly from the US and especially through financial channels.
Even with its impressive growth rates and astonishing pace of change, Asia faces enormous challenges. A massive infrastructure deficit plagues all countries in the South Asia region. For example, to catch up to China’s present levels of infrastructure per capita, India will have to invest around 12% of GDP per year until 2015, approximately four times its current investment.
To sustain growth in the longer term, the problems of rising inequality and weak human development will have to be tackled. Strong growth offers the best opportunity to end the overwhelming poverty that blights South Asia – the region with the world's largest concentration of poor people. In East Asia, economic development is already improving lives dramatically. For the first time, the number of people living below $2 a day in this region has fallen below 500 million – down from 1 billion in 1990.
Asia's economic miracle has not escaped the attention of EU citizens. Europeans cannot fail to be impressed by the display of sheer economic dynamism – a growth boom that is not only re-shaping the lives of hundreds of millions of Asians but is redefining the global economy. Asia's development is creating important new markets and the EU is among those taking advantage of the vast new opportunities for trade and investment.
That said, Asian dynamism generates more fear than enthusiasm for some European citizens who feel the pressure from growing competition overseas.
This is partly the result of economic restructuring that is taking place in Europe although fears about outsourcing and delocalisation are greatly exaggerated. The Europe Union has created 17 million jobs since 1999, its unemployment rate is the lowest in 25 years and Europe attracted more than 50% of the global foreign direct investment between 2000 and 2006.
Europe needs to invest more confidently in change and embrace the opportunities that come from fully engaging with our Asian partners. And European citizens should be proud that by providing an open market, they have facilitated the free trade that has helped stimulate growth, and with it lift so many people out of poverty. We are committed to counter the protectionist sentiments that would be so costly to European and world prosperity but which nevertheless seem to be growing stronger.
This is not always an easy task. It can be difficult to argue the merits of open markets against the background of the EU's mounting trade deficit with East Asia – particularly China where the deficit is growing at €15 million every hour. This is partly a reflection of the huge shift within the economies of Asia to focus production in China. But it is also the result of the considerable problems European businesses face when they try to access the Chinese market. Indeed, trade barriers in China are estimated to cost EU companies €20 billion in lost trade opportunities every year.
Reciprocal openness and a level playing field are vital to resist a heavy protectionist swing in Europe. At the same time, the EU and Asia must work together to manage new challenges that stem from Asia's growth boom – whether it be Asia's rapid accumulation of reserves and their contribution to global imbalances, dealing with the growing wave of investment from Asia, or addressing volatile exchange rates.
Let me look at these challenges in closer detail.
Since the financial crisis 10 years ago, economic expansion in Asia has been marked by rising current account surpluses. Export led growth models and the massive accumulation of foreign currency reserves were originally aimed at bolstering Asia's economies against future crises, but it seems that such accumulation has gone far beyond established benchmarks of reserve adequacy.
Asian economies now account for close to 69% of the world's official foreign exchange reserves. During 2007, East Asia experienced its largest ever increase in foreign exchange reserves, reaching almost $3.3 trillion for the nine largest economies.
In Asia, it is this very accumulation that has given rise to the huge increase of assets and management by Sovereign Wealth Funds, as countries try to diversify their portfolio towards higher return investments.
The Sovereign Wealth Fund phenomenon is not new and the current financial situation has helped to underline the potential benefits of Sovereign Wealth Funds as a stabilising force. But their rapid growth [they are now estimated at $3 trillion, or about half the world reserves], and the emergence of Funds in new countries has heightened attention.
The international community is now demanding a clarification of some basic principles of transparency and good governance practices and in this context the Commission recently published a Communication on Sovereign Wealth Funds, calling for the adoption of a voluntary code of conduct for SWF.
However, the accumulation of reserves has also helped finance the current account deficit in the US. Indeed, the build up of global current account imbalances – caused by the massive current account deficit in the US and the rising trade surplus of China and other Asian and oil producing countries has now reached an unprecedented scale. Consequently, the world economy hangs in a precarious balance.
A disorderly correction of global imbalances would have dire consequences for the global economy. If financial markets were to lose confidence in the currency of the deficit country this would result in disorderly adjustments, involving wide fluctuations of exchange rates, and possibly capital flight, disruptions in international trade and mounting of protectionist pressures that would affect growth and prosperity around the world.
The major players of the world economy – the US, China, Japan, Saudi Arabia (in representation of the oil producing countries) and the euro area – agreed last April to take a number of policy actions to tackle the risks posed by global imbalances as part of the IMF's multilateral consultations.
But progress to meet these commitments has, so far, been slow. This despite the fact that the risks of a disorderly unwinding have increased since last August. Action is lacking at a time when it is most urgently needed. In today's climate of volatile financial markets and slowing global growth, all partners must make a concerted effort. We should not wait until financial markets force global adjustment.
First, a rebalancing of world demand between the United States and Asia is indispensable. The US needs to encourage private and public saving in order to shift the composition of growth away from private consumption and credit.
Asian economies can do their part by gearing macroeconomic policies to stimulate domestic consumption. At the same time, the effective appreciation of the currencies of China, Japan and other surplus countries in East Asia would help pave the way for a smooth adjustment of imbalances. Ultimately, the marked appreciation of the euro against the dollar, the Japanese yen and the Chinese Yuan does not fully reflect macroeconomic realities and one currency should not be bearing the brunt of global adjustment alone.
The euro area's current account is broadly balanced. Nevertheless, we can contribute to solving global imbalances by carrying out structural reforms that will boost our productivity and growth potential - increasing Europe's capacity to absorb imports from other parts of the world.
Already the euro area – and the EU as a whole – has made considerable progress to liberalise product and labour markets and to create new jobs. A package of reforms in financial services has accelerated the integration of European financial markets, making them broader, deeper and more efficient.
However, the hard work has only just begun. As we prepare to enter the second decade of EMU, we are now focusing on how we can make the euro area economy stronger and more dynamic in the years ahead.
Before I conclude, allow me to say a few words about the 10th anniversary of EMU. You have spent a large part of the day talking about the prospects of more regional economic integration in Asia and what our two regions can learn from one another's process of integration. So it is interesting to note how our Economic and Monetary Union, the EMU, – perhaps the most advanced stage of European integration so far – has fared in its first decade.
EMU's founding fathers set out to establish an economic and monetary union that would first and foremost deliver stability to Europe. A decade of experience tells us that they succeeded. EMU has put a definitive end to periods of internal currency turbulence within the euro area and fostered 10 years of low and stable inflation. It has shielded the euro area economy from external shocks – as our current resilience in the face of recent financial turmoil has testified. A telling success of EMU's stable macroeconomic framework is the nearly 16 million jobs created over the last 10 years alone.
Yet - as I have already mentioned - we can and will do more to raise our growth and productivity performance which has been disappointing so far. This will become even more important as new global challenges take hold. Globalisation, population ageing, and climate change and food and energy supply issues are three major trends that will deeply impact the world economy – including Asia.
But for EMU they bring their own specific implications. And significantly, budgetary policy and monetary policy alone will not be enough to address the economic impact of these challenges on the euro area economy.
For example, shocks stemming from these trends will have an impact on adjustment needs within the euro area. Even symmetric shocks may lead to significant asymmetric effects, which can only be minimised by improving the functioning of markets at national level, as they cannot be tackled by the single monetary policy.
Structural reforms have a major role to play in this context to improve the adjustment capacity of the euro area through the "competitiveness channel" – changes in wages and prices – to facilitate adjustment to changing economic conditions.
The policy agenda for the next decade of EMU will have to factor in this new set of challenges. There will be a need for more comprehensive macroeconomic surveillance in euro area countries. We will have to redouble efforts to improve the functioning of markets, with additional focus on the consequences of reforms for euro area countries.
This will require more effective governance of EMU so as to improve coordination and the decision making process. Moreover, as the euro area expands to admit new members, it is imperative that the Eurogroup improves its effectiveness in shaping EU action – both at internal action and in the wider global economy.
We need to recognise that the EMU has now to develop a more active international agenda and that the euro's share as a world currency is likely to increase further. This increases the relevance of the euro area's positions for economic agents and financial markets worldwide. It is hence necessary for the euro area to increase its involvement in global surveillance and policy coordination.
Clearly this cannot be achieved overnight, but I remain convinced that over the medium term, the most efficient way for this to happen would be through a single voice and a unified representation of the euro area in international organisation and fora and vis-à-vis our major bilateral partners.
Ladies and Gentlemen, President Kuroda, let me conclude.
As Asia continues its spectacular economic growth and asserts its global importance, it is also strengthening its international ties, not least with the European Union. As major players in the world economy, the EU and the countries of the Asian region are key partners. We share common aspirations for economic development and social justice, but we also face common challenges.
Whichever path Asia chooses for its future development, it too will have to manage the consequences of a changing world economy. But in a globalising world that is rapidly integrating, we can draw valuable lessons from each other's approach to tackling shared challenges. Indeed, as EU – ASEM relations grow stronger, we have much to gain from sharing our knowledge and experience.
Therefore once again I would like to thank the Asian Development Bank for co-organising this constructive day of discussion and debate and to extend my special thanks to President Kuroda for his contribution to this successful conference.