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01 May 2012

FT: Time to apply EM lessons to euro crisis


William Rhodes writes that it is urgent that the leaders of Europe and the US learn from the experiences of the key emerging market economies in addressing today's crucial difficulties.

Mexico, Brazil, South Korea and Turkey emerged in recent decades from severe economic crises to secure dynamic and sustained rates of economic growth, financial market confidence and establish increasingly strong democratic institutions.

Political leaders in Europe must now confront the eurozone crisis with the boldness and realism that leaders in successful emerging markets did in the past. Further fence-sitting is unacceptable: financial market confidence in the ability of Europe’s political leaders to act is deteriorating at an accelerating tempo.

Successful crisis management leaders in emerging markets, from President Fernando Henrique Cardoso in Brazil in 1990, and South Korea’s Kim Dae-jung in 1998, to Turkish economics finance minister Kermal Dervis just a decade ago, crucially understood how important regaining market confidence was to their economies. They all put in place bold programmes that restored market access – programmes that combined pro-growth actions that secured domestic public support; structural reforms that enhanced competitiveness; and medium-term budget plans to expunge formidable excesses.

Today, such forthright and comprehensive policy approaches are lacking on both sides of the Atlantic. The dangers of a protracted economic malaise seem lost on our political leaders. They seem almost as oblivious to the risks to the global economy now as they were, for example, in early 2007 when a number of us warned of the rising dangers of the US housing bubble.

Two important lessons from emerging market sovereign debt crises are that contagion is always greater than policymakers anticipate, and time is the enemy. Financial markets are now signalling that the clock is running fast and that the impact of further delay in acting resolutely, especially in the eurozone, will be to deepen Europe’s problems and to spread the pain to a still greater degree far beyond Europe’s borders.

Full article (FT subscription required)



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