ASIAS POLICY DILEMMA: PAUSE OF PREEMPTIVE STRIKE

Prepared By: Group 6 Ashiqur Rahman Khan Abdullah Al Mahmud Sadman Safat Tanvir Alam Shafquat Ahmed Ashfaqul Haq Chowdhury Abir Hasan Niloy

ZR-26 ZR-27 ZR-36 ZR-37 ZR-38 ZR-44 ZR-62

December 15, 2011

Asia & Europe

The EU imports from Asia labor intensive goods & exports capital & technology intensive goods & services. Starting in the 1950s, trade agreements with Asia followed the general pattern of EU trade policy liberalization.

Asia & Europe

Value Exports Total Region North America Latin America Western Europe C./E. Europe/Baltic States/CIS Africa Middle East Asia Product group Agricultural products Mining products Manufactures 1394 367 35 252 13 21 37 650 99 87 1177 Share Exports 100.0 26.3 2.5 18.1 0.9 1.5 2.6 46.6 7.1 6.3 84.5 Imports 100.0 17.2 1.6 15.4 1.4 1.3 6.4 56.7 10.6 14.5 72.5

Euro zone Crisis

Poorer Consumers Cheaper Products

Quantitative Easing

Quantitative Easing
Interest rate cut

People withdrawing money/taking loan

Inflation

Currency value depreciates

Cheaper products

How Products Get Cheaper

Suppose 1 Euro= 100 BDT Average labor salary is 200 BDT or 2 Euro Currency Depreciates 1 Euro= 200 BDT Average labor salary is 200 BDT or 1 Euro

Downside of QE Downside of QE

IF Eurozone rebounds Asian economies will be overheated

Downside of QE Downside of QE

More capital inflow

People getting richer

Larger aggregate domestic demand

Shortage of funds/capacity to meet the demand

Major policies proposed so far

EFSF ESM Eurobond Fiscal Integration More control of ECB over national banks

EFSF & ESM

Not enough commitment of funds to calm the markets Leveraged mechanisms compete with sovereign bonds

Fiscal Integration (Or Austerity Union?)

the priority should be a march towards greater fiscal discipline, to be enforced by strong referees - Merkozy

Fiscal Integration (Or Austerity Union?)

The focus is on Implementing more austerity measures
Increasing taxes Reducing social security benefits

Reducing sovereign budget deficits Bringing down the debt to GDP ratio

Bottom-line

VERY LITTLE FOCUS ON GROWTH

Faults of the proposed solutions

Fiscal Integration (Austerity Union??)
But as we ve witnessed for more than a year, cutting alone won t bolster investor confidence. They simply don t believe that the financial adjustments these countries must make can be achieved in any reasonable period of time. What these countries are being asked to do is reverse years in some cases, decades of fiscal policy in a matter of months. (France hasn t recorded a budget surplus since 1974.)

DEBT GDP

Higher taxes

Lower AD

Lower money supply

Higher interest rates

Fewer investment

Little job creation

DEBT GDP

DEBT GDP

DEBT GDP

What Should Asia Do?

ASIA

$ $

Resources

Business with Europe declining

Local businesses struggling

BUSINESS FIRMS
Lay offs
Products

Hinder growth

EUROZONE

Cut the Interest Rate

Side effects
Overheated economy Inflation Asset Bubble

GDP Growth
10.4 10.3 9.2 8.2 6.9 6.8 9.6

China India ASEAN-5

5.4

1.7

2009

2010

2011

8.32% 7.68%

Inflation
6.04%

4.19%

2.80%

Bangladesh

India

ASEAN 5

China

Malaysia

6.0% 6.0%

Central Bank Rates

2009 4.0% 3.7% 2.8% 2.8% 2.8% 2010

5.0% 5.0%

1.0%

Bangladesh

India

ASEAN 5

China

Malaysia

High Inflation + Low Interest Rate Negative Real Interest Rate

Asset Bubbles

Asset Bubble
Low interest rate and Bubble Too much money chasing Two few Assets Greater Fool Theory

Low interest rate and Bubbles

Real interest Rates below zero Cash and Short Term investment lose money Impossible to find decent yields Investors forced to turn to assets that gives return above inflation

Too much money after Too few assets

Causes Both Good and Bad Assets to appreciate excessively over their fundamental price

Bubbles
The Dot Com Bubble The 1970s Gold Boom 1997 Asian Crisis 2007-08 Real estate bubble

1970s Gold Boom

Greater Fool Theory

If I am a fool, there is a bigger fool. If there is a bigger fool, there is an even bigger fool, If there is no bigger fool , I AM THE BIGGEST FOOL!!!

Focused Quantitative Easing

Increase money supply without disturbing the interest rate. Focused Quantitative easing to support deprived economic sectors which are operating inside the PPF

TAKEAWAYS
Major Asian economies face a policy dilemma:
Quantitative easing? OR, Wait & See?

We believe the current proposals would take years if not decades to come to effect

TAKEAWAYS
Hence, to maintain business with Europe, it is best for Asia to take pre-emptive actions such as cutting interest rates now However, it might have some negative side effects, for instance inflation and property bubble

Thank You!