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The global shock that began with the sub-prime mortgage crisis in 2007 continues. The massive central bank infusion of funds in August 2007 solved the liquidity problem of the crisis but a year later …
The global shock that began with the sub-prime mortgage crisis in 2007 continues. The massive central bank infusion of funds in August 2007 solved the liquidity problem of the crisis but a year later the soaring dollar (against the euro) brought on disinflation and the greatest financial crisis since the great depression. Quantitative easing in March 2009 brought on a recovery but it was aborted when the dollar was allowed to soar again against the euro in the wake of the European debt crisis aborting the US recovery. A second round of quantitative easing in September-October of 2010 brought the dollar down and created the monetary conditions for US recovery.
In its wake, however, the quantitative easing and depreciating dollar has created problems of imported inflation for countries with currencies tied to the dollar and currency appreciation of countries practicing inflation targeting,
Quantitative easing has created problems for countries tending toward surplus with the U.S. The Japanese Yen has hit record highs (since 1995) and slowed recovery there. The euro, which has appreciated by more than 15% in the fall of 2010 is bound to exacerbate solvency problems in the euro area.
China s surplus has given it bulging reserves of more than $2.65 trillion.
Japan was correct to intervene in the foreign exchange market to prevent a further appreciation of the yen. Japan s sluggish economic performance has been aggravated by a strong yen in a world which has typical signs of deflation. Japan s policy mix of tight money and large budget deficits is not in the long run viable.
The European fiscal crisis created shock waves through the European community and much of the world. It was initially a Greek fiscal problem, but it threatened to turn into a euro problem. The euro had the effect of relaxing fiscal discipline in some of the countries, since it removed the fear of a currency crisis. The entry of poorer countries into the eurozone removed the risk of currency depreciation and led to higher government spending until the second barrier of fiscal solvency was reached. The euro crisis arose when the richer countries of the north balked at bailing out the debt-ridden countries of the south. In new monetary union like that of EMU, a formula must be found for achieving solvency without undermining fiscal responsibility. The Growth and Stability Pact set up along with EMU failed because it lacked the political strength to enforce its directives.
The long-term future of EMU will depend on a move toward economic federalism.
The Korea-EU FTA will come into effect in July 2011. The free trade area should be a great benefit to Korea especially to the automobile and electronic industries. It will be more profitable the healthier is the European economy and the better Europe can cope with its debt problems.
Korea will have to determine how it wants to let its exchange rate policy regarding the euro be affected by the free trade area.
Global imbalances represent a problem in the world economy and there are some who see these imbalances at the heart of the current fiscal crisis. The Obama administration has been pressuring China to revalue its Yuan against the US dollar and recently China has returned to its policy over 2005-8 of slow appreciation. But appreciation is not the only and it is hardly ever the best way to deal with imbalances. First of all, imbalances, are never the problem of only one country. China and the United States must both take action to reduce excessive trade imbalances. Exchange rate appreciation is not the best way for dealing with imbalances. Throughout history exchange rate appreciation has hardly ever been forced upon a country. The U.S. had large surpluses for sixty years (from 1915 to 1975). It never appreciated its currency. There was widespread discussion at the Bretton Woods negotiations to apply restrictions against a country with a scarce currency (it was aimed at the dollar), but it