ASEAN expectations of Europe

Europe’s recent travails have been of keen interest to us in Asia, especially as they triggered talk of a recurrence of the financial meltdown of 2008. So it was with both eagerness and curiosity that I agreed to take part last May 13 in a panel discussion on the subject of “Asian Expectations of Europe’s Role in the Global Economy” at the Asia Pacific-German Conference in Singapore. The panelists included German Minister of Economics and Technology, Rainer Bruderle, Dr. Jurgen Hambrecht, Chairman of BASF, Singapore Minister Lim Hng Kiang, Dr. Surin Pitsuan, ASEAN Secretary General, and the moderator was David Marsh of the London and Oxford Group. The audience consisted of 760 CEOs and businessmen, mostly German. Below, I reproduce parts of my remarks and some other thoughts on the forum subject.

In addition to having an abiding interest in European affairs, I served as the Philippine ambassador to the European Commission in Brussels and later as Philippine foreign minister in the late ‘80s and early ‘90s. During that period of public service, I witnessed first-hand the opportunities offered by the creation of the “Single European Market” even as we, in ASEAN, expressed concern about a potential “Fortress Europe.” And I had the good fortune of having the opportunity to contribute to promoting a closer economic partnership between Europe and the Philippines.

From an ASEAN business perspective, the following bears restating at this time of anxiety about Europe’s role in the global economy:

First, Europe remains a major market and principal source of foreign direct investments (FDI) for ASEAN. It seems fashionable now to talk about a rebalancing of East Asia’s economies as key to global economic stability – in other words they should consume more and export less — so they don’t keep accumulating surpluses. This is already starting to happen, but how fast the process will be will depend on how fast these countries grow more affluent. While the dependency of Asian economies on exports and FDI vary from country to country, all of them need both in large doses. For small economies like Singapore and Brunei, they simply have no choice but to turn to the world market. ASEAN economies have the EU as their leading market and primary source of investments, and for the rest, a significant source of both. The EU needs to keep its markets open so that ASEAN economies could continue to grow and in turn become strong consumers of EU goods and services.

Second, European companies have in effect been instrumental in promoting ASEAN as a single market. The EU is ASEAN’s biggest investor and its third largest trading partner. Even so, the ASEAN-EU relationship has much farther to go to reach its full potential. The business sector, not government, has become the principal actor in this integration, not only between the EU and ASEAN, but within ASEAN itself. Indeed a significant part even of intra-ASEAN trade is driven by multinationals, many of them European. A survey conducted by the European Commission Asia Invest Programme some years ago revealed that European giants like Unilever, Siemens, Alcatel-Lucent, Nestlé, Philips, Daimler Ag, Shell, Thyssen, L’Oréal, and ST Microelectronics have shifted from plant location based on “country-targeted units (one or more production units manufacturing a range of products to be sold locally), to a product-targeted structure, where regional units are producing the same goods (with corresponding economies of scale) in dedicated plants, to be sold across the whole ASEAN market.”

But business can only go so far in playing this role without active encouragement from government through appropriate policies and incentives. The dynamics of global trade now derive from the value chains and network driven operations of multinationals – given the advances in logistics and IT – where location is determined by who does what best. It behooves both ASEAN and Europe to eliminate restrictions on the movement of goods, services and investments at the border and now increasingly more important as tariff barriers go down, to promote ease of doing business through regulatory reform. Transaction costs now account for a greater percentage of the final price now that everything else is going down.

Finally, both sides – ASEAN and Europe – must overcome their trepidation and idealism to develop closer economic partnership. It’s time for both sides to pursue aggressively Free Trade Agreements between them.

There is a precautionary tale in all of this however. It may seem ironic to talk today about Europe’s role in the global economy when up until last Monday it didn’t even look capable of fixing its own economic and financial mess. The situation was so alarming that many thought that the Euro Zone was in peril and that the disintegration of the European Union was imminent.

Rodrigo de Rato, managing director of the IMF, saw the crisis coming five years ago. He said that Europe had to resolve some fundamental structural weaknesses if it was to help – rather than burden – the global economy. He warned of looming fiscal problems arising from an aging population and its generous welfare and employment policies in the midst of slowing growth. He noted the lack of transparency and coordination of fiscal policies. He called for structural reforms that would address supply-side constraints and raise domestic demand. By addressing these issues, he said, Europe would then be able to head off looming fiscal problems, improve employment, and promote social stability.

This did not happen and the rest as we know is history, and one that is still unfolding. But I am a firm believer that Europe will sort itself out and figure a way to get out of this mess. The logic for all European countries to act together for their own individual good remains compelling even to the increasingly skeptical German taxpayers. Emergency measures – of unprecedented magnitude – have stemmed the liquidity crisis in Greece, but its long term solvency evidently calls for greater coordination of economic and fiscal policies – a move which some see as a step closer to common economic governance. In other words this means subsuming national economic prerogatives to the regional interest. Whether there is the political will to carry this out remains to be seen.

For several decades, Europe has been the model for ASEAN in equating regional interest with national interest. Now, many in our region are asking: Will Europe continue to follow this policy? Will it finally have the political and economic leadership that will make the EU a desirable and valued global partner?

The issue of European economic leadership in the global economy is important because our world today has never been more interdependent than it is now. With its innovative companies and affluent consumers, Europe will continue to exert a significant influence on the world economy. A weakened European economy impacts greatly on the rest of the world, Asia especially. –Roberto R. Romulo (The Philippine Star)