Tim Colebatch, The Age

For the most part, Australia is a spectator to global economic events. In some ways — such as the rapid rise of China — we’re beneficiaries. But in other areas, we can be knocked for six by events out of our control. The calamity presently befalling Europe is one such event. Already, fears about Greek default have seen the Australian dollar ‘slump’ — now hovering around parity with the US dollar, with expectations it could fall further. Just months ago, it was buying 1.10 US dollars.

In a primer for Australian audiences, Tim Colebatch (economics editor for The Age) summarises the current drama in Europe. Readers of this blog would be well aware of the key issues at play. The question is, what does it mean for Australia? For one thing, Treasurer Wayne Swan must be nervously watching how Greece’s politicians act. If Greece defaults on its debts, and leaves the Eurozone, there could be wide reaching ramifications for financial markets — on a par, some say, with the collapse of the US bank Lehman Brothers in 2008 that precipitated a rapid deterioration in economic conditions around the world. (Others, it must be said, believe the Greek situation has been sufficiently managed to limit any fallout.)

In the worst case scenario, a new global financial crisis would — unsurprisingly — unleash a new wave of turmoil on stock markets. Australian banks, reliant on access to overseas funding sources, would be exposed if borrowing costs surged amid investor skittishness. What Colebatch doesn’t mention is that, unlike during the GFC, China’s economy is also easing off. In short, the conditions aren’t as favourable for Australia this time around.

Der Spiegel, German newsmagazine

Greece is almost certain to go back to the polls next month, after parliamentary elections this month proved inconclusive. What seems clear is that radical-left party Syriza looks set to play a dominant role in Greek politics in the near-term. Its young leader, Alexis Tsipras, rails against the austerity measures inflicted on Greece, and is vowing that any government his party supports will reject the conditions and call on Europe’s leaders to return to the negotiating table. Europe is unimpressed with that idea: Germany, in particular, insists that Greece must stick to its bailout agreement, or lose its only financial lifeline.

If Tsipras does find himself, eventually, in a position to call Europe’s bluff — and Germany holds its ground — Greece would likely withdraw from the European monetary union. The writers at German newsmagazine Der Spiegel recognise the pain this would inflict, but also consider it the best option for Europe, and for Greece itself.

From Europe’s perspective, the dangers associated with renegotiating the bailout term are simply too great. If Greece gets a better deal, other recipient states would surely demand greater leeway as well. As it is, Der Spiegel considers that Greece has failed in its current reform program. Meanwhile, public anger in those countries footing the bill — chiefly Germany — would increase. Instead of weaker countries potentially leaving the Eurozone, instead the pressure on stronger countries to depart would grow.

If Greece were to return to the drachma, it could instantly devalue its currency — helping to restore the international competitiveness it has lost within the Eurozone. This isn’t just about consumer purchasing power (that is, raising the relative price of imports into Greece and lowering the relative price of Greek exports abroad). Foreigners could buy up Greek companies for a song, and transform their operations — a chance for the sort of private sector growth that Greece has been sorely lacking in.

Of course, devaluation on its own will not be sufficient. Greece still needs to restructure its welfare system, reduce barriers to industry, and reform its labour laws. These are the measures that will provide the long-term incentives for economic prosperity — and precisely the sorts of things that Greece has struggled with even under the current pressure from investors and foreign governments. And the rest of Europe will have challenges of its own. As Der Spiegel concludes, ‘if Greece returns to the drachma, that will be the point when Europe’s work really begins’.

Wall Street Journal editorial

In recent months, markets have been rattled by the prospect that China’s state-led engine for economic growth is spluttering — or, more charitably, the state is taking its foot off the accelerator. The plentiful supply of labour that has helped to supercharge the Chinese economy is starting to dry up (although even this can only be a relative judgement in a country with well over a billion people). That means that greater emphasis must be placed on lifting productivity.

China’s workers are certainly becoming more productive, partly due to the fruits of the country’s development: a more educated workforce, and greater technical innovation. But there is much still to be done. Capital misallocation remains a danger for China. To overcome this, greater liberalisation of financial markets is necessary. This isn’t just a story about the yuan — which American politicians love to attack as artificially undervalued. It’s about capital controls, with government calling the shots on where banks should invest the savings of Chinese workers. China’s banks, while seemingly profitable, are still highly dependent on the state. They hold vast sums of non-performing loans, and given rising costs of capital, this is hobbling the domestic banking sector. 

Less state-directed investment would aid the growth of China’s financial sector. It would also limit the scope for corruption, with senior bureaucrats less able to grant favours to feather their own nests. Finally, a freer economy will be less open to criticism from foreigners. All in all, the Wall Street Journal reckons that it’s a recipe for making China easier to govern.