Asia not alarmed by 'Grexit'

The leaders of the 28-nation European Union are set to meet on Sunday, July 12, to decide on the fate of Greece in the eurozone. If the Greek government fails to reach an agreement with its creditor institutions - the European Commission, the European Central Bank and the International Monetary Fund - on a credible reform package leading to a new bailout program for the debt-wracked nation, Greece might be end up exiting the currency union.

While some are concerned that such an event could have unforeseen consequences for the global economy, others say a so-called "Grexit" would only have a limited global impact, pointing to Greece's relatively small economic size and the muted market reaction worldwide to the developments in the country so far.

In a DW interview, Gauri Khandekar, Europe director of Indian think tank Global Relations Forum, says a scenario where Greece would end up leaving the eurozone would not be as big an international travesty as many in Europe perceive it to be. The analyst adds that the recent Chinese market crash is by far the most worrisome development at the moment and one that could have real significant repercussions for the world economy.

DW: How are Asian countries viewing the current eurozone crisis involving Greece?

Gauri Khandekar: Asian countries have been following with great apprehension the Greek crisis debacle over the past few years. Markets in Asia have often tumbled with every eurozone meeting or statements from EU leaders, and in particular with the Greek referendum which saw an overwhelming rejection of another bailout package and more austerity.

Following the referendum, Asian stocks fell on July 6 and the impact is quite worrisome given that Asia is the world's fastest-growing region. Asian countries receive most of the information out there in the media from Europe, and Europeans are more emotional than practical when dealing with the Greek crisis.

In Europe, the vast majority have perceived a potential "Grexit" as a failure of the EU integration process and the euro currency or indeed even setting some kind of precedent. But this is a false perception to transmit globally. Greece's exit would neither be the end of the euro, the EU nor set any dire precedent automatically.

European leaders have the responsibility to convey accurate, emotion-free information to Asian countries and the world at large about the impact a "Grexit" would have on the global economy, decoupled from the notion that a "Grexit" would have any impact on European integration. Portraying the drama on global markets which are extremely sensitive to speculation is quite irresponsible.

Nonetheless, what impact could Greece's exit from the eurozone have on Asian economies?

A "Grexit" would not be as big an international travesty as many here in Europe perceive it to be. This is mainly because Greece represents just 2 percent of the eurozone economy. But also, bailouts and austerity in Greece over the past five years have not worked very well.

Ideally, it would have been better to allow Greece to default, be quarantined via a temporary exit from the euro, allow a reintroduction of the former Greek currency, the drachma, and then return to the eurozone once its economy has stabilized.

With the drachma, the Greeks would have been able to devalue the currency to boost exports or print more money for liquidity which they simply cannot do with the euro.

It is the information in the media which has largely fuelled fear of a "Grexit." In reality however, "Grexit" would be better than the current stasis. It would not only reinforce Asian confidence in the eurozone's ability to deal with crisis swiftly and sternly, but also reinforce trust in the euro currency which has fallen recently once again. But it is essential for European leaders to present a possible "Grexit" in this light.

The impact on Asian markets would be based largely on the media and speculation which would also result in a further fall in the value of euro. The real impact, however, would be limited. This is because trade between Greece and Asia is next to negligible. In Europe, moreover, Germany and France overwhelmingly lead trade with Asia and both the countries have registered a growth of 0.3 percent and 0.6 percent in the first quarter of the year.

So, how exactly could such an event affect trade ties between Asia and Europe?

A "Grexit" would have a limited direct impact on Asia-Europe trade. Europe is one of the largest trading partners of Asia, but the overwhelming majority of trade between Europe and Asia transpires through Germany, France and the UK - all stable, growing economies. Moreover, Europe has a number of ongoing free trade negotiations with Asia (the EU has an FTA with South Korea in force since 2011) which remain unaffected.

The short-term impact a "Grexit" would have on Asian markets would be on currency values. A fall in the euro might even boost trade with Asia. But simultaneous devaluation of Asian currencies, following market fluctuations, might spell disaster both for Europe and Asia. This, in turn, reinforces how European leaders must handle the media and the image portrayed in the media. Portraying a potential "Grexit" in a positive light might be better for stable EU-Asia trade relations.

There is talk that Greece could seek financial help from Asian countries such as China to stabilize its economy in the event of a "Grexit." What is your take on this?

It might be useful for Greece to do so. But it is highly unlikely that China or other Asian countries might come to Greece's aid in a strong, substantive manner. This is because China is currently dealing with its own stock market crash wherein trillions of dollars have already been wiped off the country's stock markets.

Others in the region like India or Australia might not see the immediate need to support Greece financially, especially if the impact on their countries might not be severe, and because they feel Greece's wealthy European partners bear first responsibility.

Japan in the past has been quite forthcoming in supporting Europeans during financial crises. But in April this year, Japanese investors, too, dumped eurozone bonds in favor of higher-yielding bonds in other currencies like the US dollar and British pound. And nations in Southeast Asia are not as financially well off (except Singapore, Indonesia and Malaysia) to support a developed European country.

I would not place my bets on Asians coming to the rescue of Greece following a "Grexit.2 Russia can be the only probable option but Moscow would do so if it does for geopolitical reasons.

The Greek crisis is reaching its climax at a time when Chinese stock markets are plunging. Which of the two, in your view, is a bigger crisis for Asia?

The Chinese market crash is by far the most worrisome development at the moment and one that could have real significant repercussions for the global economy. Compared to the bursting of the Chinese stock market bubble, the Greek crisis is paltry. In less than a month, $3.5 trillion worth of shares traded in the Shanghai and Shenzhen exchanges have been wiped out.

Although the Chinese government is supporting state-owned companies in the markets, market value of other companies has drastically plummeted. This crisis is being dubbed China's 1929 or the year of the Great Depression. This is significant because for one, China is the world's second largest economy and two, because Asian economies are strongly intertwined with China's.

Any instability in China would immediately affect the Asia, which is currently the fastest growing region in the world. China is also one of the largest trading partners of both Europe and the US. Chinese households are a global powerhouse when it comes to spending and the crisis would have a major impact on global consumption.

Chinese tourists are the world's top spenders - spending $165 billion in 2014. They also consume 12 percent of the world's luxury goods. Both these examples impact Europe directly given the continent is one of the top destinations for Chinese tourists and that 40 percent of French luxury goods sales were bought by the Chinese.

The Chinese crash has already driven iron ore prices down for instance. Property markets in Australia too have already felt the heat. Despite the government's hands-on management, the crisis looks severe and impact would be both significant and felt globally.

Gauri Khandekar is Europe director of Indian think tank Global Relations Forum, based in its Brussels office.