Singapore: Crisis worse than 2008

PM Lee: “This is worse than 2008 meltdown” – StraitsTimes

CANNES - As an escalating debt crisis in Greece hung over the first day of the Group of 20 (G-20) nations summit in France, Prime Minister Lee Hsien Loong told G-20 leaders on Thursday that the European situation is a 'serious and volatile' one and on a bigger scale than the 2008 financial meltdown in the United States.

Speaking at the first working session of the Cannes summit over lunch, Mr Lee said that the risk of 'sudden and unpredictable' global contagion from the troubles in Europe is also higher.

Despite robust fundamentals and continued growth, Asian economies are already seeing the pullback of capital and the slowing of their exports to the West, he said.

He noted that political decision-making in the European Union - made up of 27 countries, of which 17 share a common currency - is more complex, and issued a call to the G-20 to show 'political leadership which is critical to solving economic problems'.

'Help people understand that we are in for a difficult period... and build political support for measures that involve some sacrifice today, but which will make things better eventually,' he urged.

Singapore is at the meeting of the world's leading economies for the second time as one of five invited guest countries, and Mr Lee said that he was sharing the thoughts of a 'small nation closely tied to both the advanced and developing world'.

The G-20, made up of 19 countries and the European Union, represents 85 per cent of global gross domestic product.

As world leaders descended on the French Riviera yesterday, political brinkmanship over the debt crisis in Greece threatened to hijack the proceedings.

Greece is not a member of the G-20. But Prime Minister George Papandreou's intention to put a 130 billion euro (S$227 billion) bailout plan to a national referendum kick-started a chain of events that led to European leaders making it clear that they saw the euro as more important than Greece's continued membership of the currency union.

'The medicine must not kill the patient'

The impasse dominated conversation among the G-20 throughout the day, and is likely to put progress on its original agenda - like the reform of the international monetary system - on the back burner.

PM Lee added his voice to those of other G-20 leaders in calling for an 'early and decisive solution - or else festering issues will affect the global economy'.

He said that there was a risk of prolonged stagnation and high long-term unemployment, and asked G-20 nations to consider additional measures to stave off such a scenario.

'Within the EU, Europeans must decide what to do. Globally, the International Monetary Fund should be strengthened to backstop the global system,' he said.

While measures to tackle banking and debt problems are inevitably contractionary, he said that a clear plan for growth is a fundamental part of the cure and the only sustainable way to reduce unemployment:

'Short-term pain is unavoidable, but the medicine must not kill the patient.'

Besides financial fixes to the immediate crisis, the world also needs structural reforms to raise long-term growth potential and create confidence.

Outlining how both advanced and developing economies can work together to create global growth, he said that 'tough choices are unavoidable'.

On the part of developed economies facing fiscal deficits, reform of social security systems and labour markets are needed, as well as investment in training and education to boost productivity.

For emerging market economies like those in Asia that can contribute to global demand, he suggested three measures: investment in infrastructure; increasing foreign direct investment and removing barriers to competition; and increasing exchange rate flexibility to 'help restructure and upgrade economies'.

Mr Lee sketched out a best-case scenario for the world economy, one where political leaders generate confidence that 'things are moving in the right direction':

'People believing that governments will do what is right for the long term. Businesses optimistic about future demand to spur private investments. Countries having faith that others will do their part and stay the course. Everyone confident that tomorrow will be better than today.'

He said that one thing all the countries around the table in Cannes have in common is that 'none can escape the problems which confront us all'.

'We all face domestic pressures, and must balance painful measures with soothing balm. We need bold action now, as the cost of inaction is higher down the road,' he said.

Speaking to The Straits Times separately, Insead professor of banking and finance Jean Dermine underlined the seriousness of the current euro zone crisis:

'What is a big difference this time around, compared to the US financial crisis in 2008, is that the economies around the world are slowing at the same time. Then, Latin America and Asia were booming, so that was helping the world economy. This is no longer the case.'