The World in Economic Crisis:

What are The Causes and Impacts to Asia, Particularly Indonesia?

Reny Fitriana Kaban
SYLFF Fellow from University of Indonesia

Abstract
This paper attempts to put some points of view about the worlds economic crisis, precisely the
causes and the impacts that have occurred after the economic crisis in Europe. It appears to have
made specific problems for Asia and other countries, particularly Indonesia. The causes of
worlds economic crisis are divided into two circumstances, first the global financial crisis in
2008 and second the sovereign debt crisis of the euro area. Illiquidity, ratio of reserves to shortterm external debt, a larger stock of lending from advanced countries, higher ratio of current
account deficits to GDP and higher ratio of private credit to GDP, are the causes of the global
financial crisis in 2008 from the financial aspect. While from the trade aspect, unexpected
trading-partner growth and emerging market economies with higher dependence on demand
from the advanced economies experienced are the causes of this crisis. There are some causes of
European Union debt crisis such as recession, bank bailouts, sluggish growth, housing slump,
and tight monetary policy.
There are three key channels through which the impact of the European debt crisis is
likely to spill over into the Asia region. The first is the impact on the cost of sovereign debt
financing for Asia economies. The second is the trade channel, driven by the effect of reduced
growth in some European countries on import demand for Asia goods and services. The third is
the impact of the debt crisis on the global financial sector. Overall, the debt crisis in European
countries remains worrisome and will have an impact on Asia exports.
Indonesias economy has not been too affected by the euro crisis, as Europe is not the
countrys main export destination. The statistics show that Indonesia has good economic
fundamentals amid the global economic uncertainty. Still Indonesia must be careful in facing the
risks that arise from the European crisis because this crisis is still growing and creating
uncertainties. Indonesian must remain cautious.
Keywords : Economic crisis, global financial crisis, European Union debt crisis, Asia, Indonesia
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Introduction
Movies have been made; natural disasters have taken place, all for the year 2012. What about the
unnatural disaster economies fallen, displaced workers countries rocked by economic debt. What
is the price to the people of the world? Yours and mine! What were the causes of this economic
demise? Is it the greed of banks and credit facilitators? Countries surviving by the use of credit
cards and hire purchase agreements, buy now pay later. Well, bad economics mean loss of jobs,
no increases in salaries etc. well, how do they pay their credit agreements, mortgagees etc, now
they become just bad debts.
Asia, particularly Indonesia is beginning to feel the affects of the European recession. But
more interestingly, before we can put right wrongs done, we must understand where, how the
wrong began? Where did it begin? Was it in the start of the worlds natural disasters? No it was
before that the American crisis in 2008 over the value of the dollar! All currencies are equated to
the dollar. There is fighting between the euro and the dollar also the edging of other currencies to
them. International monitory loans to countries riddled with debt. Previous loans cancelled
unpaid new loans given. Why is this? Where is the money going?
The outrageous cost of bombs and arms and the cost of armies dwelling in other counties
are destroying countries economics outrageous credit facilities are making people believe their
life styles will last the way it is! All are leading to false hope end false idealism. Countries
exports are linked to credit systems of payment, followed by unpaid accounts
higher interest rates to banks. Where are the days when we bought what we could truly afford to
buy? Look at any car on the road you cant tell if it was paid for in cash or by credit!
Yes its true, electronics, cars, and household goods we can by all on credit, and can we
truly afford it? Im sorry but I worry about the affects that are waiting to hurt Indonesia. It is a
developing country with many wide ranges of resources for exportation. We dont want this
unnatural disaster to hurt Indonesia. At this time, education, sports, facilities, roads are still
undeveloped, but malls, hotels, anywhere with credit facilities are booming just like America and
Europe was before the recession. This is a paradox, and must be solved with full efforts from
many parties, from top to down in each level of stakeholders in this world.

The causes of economic crisis

1. The Global Financial Crisis in 2008
The causes of the global financial crisis in 2008 have been discussed similarly from two kinds of
aspect, financial and trade. First from the financial aspect, illiquidity is one of causes as in the
Asian financial crisis in 1997. Lane and Milesi-Ferretti and Blanchard, Faruqee, and Das found
that the ratio of reserves to short-term external debt is significant in explaining the severity of
the crisis. However, Blanchard et al added that the effect comes mostly from short-term debt
rather than from reserves. On the other hand, Llaudes, Salman, and Chivakul and Lane et al
found that reserves helped dampen the impact of the crisis on emerging market economies. Other
than short-term debt, Berkmen, Gelos, Rennhack and Walsh showed that a larger stock of
lending from advanced countries contributed to a more severe downward revision of the growth
forecast.
The similar results were indicated by Lane et al and Llaudes et al. As was in the Asian
financial crisis, the fact that the ratio to current account deficits to GDP are significantly
correlated with the crisis was proved through the regression analyses by Lane et al and
Blanchard et al. In the domestic economies, similar to the Asian financial crisis, Berkmen et al,
Lane et al and Llaudes et al found that a higher ratio of private credit to GDP and a larger
increase in that ratio affected the severity of a crisis. Berkmen et aland Llaudes et al found in
addition that the severity was more pronounced for countries with fixed exchange rate regimes.
Second, from the trade aspect, Blanchard et al determined from their regression analyses
for 29 countries that the variables of unexpected trading-partner growth were significant in
explaining unexpected GDP growth in emerging economies. Llaudes et al found that
emerging market economies with higher dependence on demand from the advanced economies
experienced sharper falls in output during the crisis. Berkmen et al and Lane et al further found
that the share of manufacturing products in total exports (or in GDP) is correlated with worse
growth performance1.
2. The Sovereign Debt Crisis of the Euro Area
The most immediate consequence of the Euro area debt crisis is the trust crisis that befalls on the
national debts of the member States of the zone with together with its impact on mechanisms set
1

M. Kanaoka. Have The Lessons Learned from The Asian Financial Crisis Been Applied Effectively in Asian
Economies? International Journal of Economics and Finance Vol. 4, No. 2; February 2012. pp 2

up by the European Union to mitigate that crisis and the European Financial Stability Fund
(EFSF). In effect, the AAA note of this fund depends on that of the countries which support it,
and in this case, Germany and France. It allowed the affected countries (Portugal, Greece, and
Spain) to borrow on the same conditions as Germany (2%) or France (3%). Since January 13th,
2012, Aid plans in these countries have become more expensive. It may thus have a reverse
effect on the sustainability of anti-crisis measures griped in September 2011. In so far as it
continues to weaken the European currency position, and consequently a domino effect is to be
feared. Banks had announced the events of January 13th, 2012 when they suspended negotiations
with Greece on the modalities of the restructuring of its national debt which meant that they
could come back on their promise to reduce Greeces debt by half! 2
Base on the Source data from the CIA World Fact book, as of December 11, 2011 the
GDP figure (figure 1) used is at official exchange rates. Current account balances refer to the net
import or export activity of a country. A trade surplus is when exports exceed imports. A trade
deficit is when imports exceed exports. Germany has a significant trade surplus, meaning it is a
net exporter. The other countries often mentioned in this crisis all have trade deficits. Trade
deficits have goods and services components. A country that is a net importer of goods and
services must borrow capital to fund this activity. This is referred to as the balance of
payments identity. It may be helpful to think of it as a form of vendor financing, with the surplus
country taking the wealth it receives in exchange for goods and lending it back to the deficit
country.3
The debt to the GDP ratio is calculated for each quarter using the sum of GDP for the last
four quarters. Data on GDP are the most recent transmitted by the EU Member States. The
highest ratios of government debt to GDP at the end of the first quarter of 2012 were recorded in
Greece (132,4%) , Italy (123,3%), Portugal (111,7%) and Ireland (108,5%), and the lowest in
Estonia (6,6%), Bulgaria (16,7%) and Luxembourg (20,9%).4 The complete chart can be seen in
Figure 2.
2

I. Tamba. Euro Area Sovereign Debt Crisis: What Economic Policy Consequences and Implications for the Franc
Zone African Countries? International Journal of Economics and Finance; Vol. 4, No. 8; 2012 pp 2
3

http://en.wikipedia.org/wiki/File:Current_Account_Balances_2010.png
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/2-23042012-AP-EN.PDF

Figure 1. Current Account Balances of EU Countries in 2010

Figure 2.

Source : Eurostat news releases 111/2012-23 July 2012

Causes of European Union Debt Crisis

There are some causes of European Union debt crisis as follows5:
Recession. In recession tax revenues fall, and governments spend more on unemployment
benefits, therefore the deficit raises increasing total debt levels.
Bank Bailouts. In the case of Ireland, the majority of the rise in public sector debt was because
the government took on the debt of private sector banks which had failed. In 2010, the Irish
government spent 45bn Euros (39bn), causing the government to run a budget deficit equivalent
to 32% of GDP in 2010. The Irish bank bailout cost roughly 30% of Irish GDP, compared to the
UK bank intervention which cost roughly 6% of GDP Irish Bank bailout at BBC
Sluggish Growth. Countries with sluggish growth forecasts worried bond markets because with
low growth prospects it becomes difficult to pay back the debt.
Housing Slump. Countries like Spain and Ireland are facing a prolonged slump in house price.
This is exacerbating bank losses and diminishing prospect for growth.
Tight Monetary Policy. Many of the peripheral EU countries lack the ability to devalue their
currency because they are in the Euro. Therefore to regain competitiveness there is a need to
pursue deflationary policies (cutting wages etc). These damages growth and makes bonds less
attractive.
The European debt crisis: implications for Asia 6
Asia economies are increasingly concerned about the impact of the public debt crisis in a number
of European economies. In recent months, the scale of public debt in Greece in particular, but
also in Ireland, Portugal and Spain, has led to credit downgrades and increases in the debt
servicing costs of those countries. In response, their Governments have pledged to close their
fiscal deficits and decrease their levels of debt in the coming years through stringent programs of
budget cuts, as affirmed recently by the G-20.1 Further compounding the fiscal gap are ageing
societies and decades-old weak economic growth which will require additional resources as well
as leading to declining tax proceeds. Consequently, the global financial markets have yet to be
convinced that the affected countries will be able to reduce budget deficits sufficiently to lower
5

http://www.economicshelp.org/blog/2847/economics/eu-debt-crisis/

S. Banerjee, The European Debt Crisis: Implications for Asia and the Pacific. MPDD Policy Briefs, No. 4
August 2010, pp. 1-6

public debt to the level required. The worst-case scenario of sovereign debt defaults in one or
more European countries at some point remains a concern.
For Asia economies, two questions arise:
(a) To what degree will these difficulties translate into reduced growth prospects as the region
continues its V-shaped recovery from the global economic crisis? While some impact on Asia is
inevitable given the global linkages of economies in this region, it is important to establish
whether the impact will be restricted to a limited moderating of their otherwise robust ongoing
recovery, or whether the impact will threaten a downturn in Asia akin to a double-dip recession;
(b) As the crisis has exposed policy tensions inherent to the European integration process, how
will the Asia region evolve its exchange rate and fiscal policy coordination?
Impact of the crisis
There are three key channels through which the impact of the European debt crisis is likely to
spill over into the Asia region. The first is the impact on the cost of sovereign debt financing for
Asia economies. The second is the trade channel, driven by the effect of reduced growth in some
European countries on import demand for Asia goods and services. The third is the impact of the
debt crisis on the global financial sector, and the consequent effect on the provision of credit to
the regional banking and private sectors.
Public debt financing in Asia less at risk
The most immediate pressure point for European Governments with public debt pressures will
come from the financing of upcoming debt issues. Global financial markets are pricing in the risk
of default, with yield spreads on sovereign debt rising up to and even beyond the levels last seen
during the subprime crisis in some countries (figure 3). The countries most affected have been
those with persistently large public debt stocks as a proportion of their economies, high budget
deficits, and consequently profligate public spending. In an effort to allay future questions of
debt sustainability, these countries are also committing to sizeable deficit reduction programs in
the coming years.

Figure 3. Spreads between selected European long-term sovereign bond yields and 10-year German sovereign
bond yields, January 2008 to May 2010

Sources: ESCAP analysis based on data from EIU online, accessed on 10 June 2010; and OECDStat Extracts

The risk for Asia Governments lies in the possibility that financial markets might harbor
similar concerns about their management of public debt. This would manifest itself in similar
increases in the funding cost of new sovereign debt issuance. Such a situation would not only
increase the budgetary impact to governments of new debt issuance, it would also increase the
private sectors cost of issuing debt. This crowding out effect is due to the fact that interest rates
on private sector debts are usually set on the basis of a risk premium over and above that of the
economys sovereign bond rates.
However, as it appears, the European debt crisis remains contained. No evidence of
herding has emerged, suggesting that financial markets are adopting an increasingly
sophisticated and differentiated view of global emerging economies. The spread on credit default
swaps for Asian sovereign bonds, the cost to insure against default on such bonds, has remained
fairly steady and is far below the levels seen during the subprime crisis (figure 4). This means
that the markets currently do not view significant risks for sovereign debt issued from the region.

Figure4. Sovereign bond credit default swap spreads for selected developing Asian economies, January 2007
to June 2010

Source: ESCAP analysis, based on data from ADB AsianBondsOnline, accessed on 11 June 2010

Overall, the debt crisis in European countries remains worrisome and will have an impact
on Asia exports, but this will be somewhat offset by demand from the United States and from
within Asia. The more pressing concern for growth in this region is the possibility that the debt
crisis will spill over to the rest of the European Union and the global economy through the
financial channel
Systemic implications for macroeconomic coordination in Asia and the Pacific
The global crisis, and subsequently the European debt crisis, continues to strengthen the regions
resolve to search for new sources of economic growth from within. To achieve this, the political
will to boost regional economic integration through, inter alia, enhanced macroeconomic policy
coordination, has gained momentum. In this regard, coordination on fiscal spending and
exchange rate management are two key areas in which policymakers agree that policy action will
be needed in future. Indeed, the pros and cons of a coordinated currency management system
have been heavily debated for quite some time, a key concern being the need to avoid
competitive devaluations of currencies in the region as a means of boosting trade during
downturns.
In parallel, the integration of the European economic community and the birth in 1999 of
its common currency, the euro, as the most visible manifestation of a European Union, and now
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its debt crisis have all provided Asia policymakers with a fascinating study of what is an
extraordinary experiment in regional governance and common policymaking.
What might be some of the immediate policy implications for Asia and the Pacific arising
from the European debt crisis and its common currency? Or, put differently, can currency
unification function without organized fiscal coordination among countries sharing the same
currency? Going further, can fiscal coordination exist without political union? To what extent do
monetary goals need to be balanced with fiscal policy to ensure the desired direction of a
regions macro economy? As the debt crisis evolves and continues to challenge the very future of
the euro, these questions remain as vexing to European policymakers as they were a decade ago.
While it is beyond the scope of this particular policy brief to address these issues in
depth, there are a few key points that are of importance to the Asia region:
(a) The debt crisis and subsequent decline in the value of the euro, nearly 15 per cent this year,
revealed the tensions inherent in a monetary policy that is centralized by the European Central
Bankstatutorily the most politically independent central bank in the worldand a fiscal policy
that remains decentralized at the national level and is therefore much more politicized;
(b) The crisis also revealed that the European Stability and Growth Act, which was designed
precisely to overcome the disconnect identified above, is, despite its convergence criteria rules,
too blunt an instrument, particularly in times of severe recession, to ensure stability in the Union.
As of today, the fiscal deficit in the euro area stands at -7 per cent;
(c) Instead, a deeper, shared fiscal governance system carries with it the distinct advantage of
enabling automatic stabilizers to transfer fiscal resources from one area to another, without
acrimonious debates over how to distribute resources from one country to another. However, the
extent to which countries must relinquish sovereignty in matters of taxation and spending has
made this perhaps the most politically contested aspect of economic governance in the European
Union and would suggest that any form of fiscal federalism in future may be politically
untenable;
(d) Historically, most currency unifications or monetary unions that were not accompanied by
fiscal and political unions folded when exogenous shocks hit. Currency union member countries
should therefore share an understanding of how to deal with shocks and, when national interests
give rise to conflicts, these costs should be accepted in the name of solidarity;

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(e) Politically, a shared monetary policy is more palatable during a downturn if there is a shared
federal fiscal system in place.
In charting its way forward, the Asia will necessarily evolve its own forms of policy
coordination while drawing on the lessons and experiences emerging from the European Union.
At this point, the European crisis underlines the need for policy coordination over exchange rates
to move in parallel with some form of fiscal policy cooperation and deep political will to
maintain solidarity in the face of what could otherwise be untenable disconnects. The Act defines
the conditions and levels at which deficits and public debts (-3% and 60% of GDP, respectively)
may be subject to corrections and the sanctions and penalties that would prevail on noncompliant members of the European Union.
The Euro crisis and its impact on Indonesias economy
Overall, Indonesias economy has not been too affected by the euro crisis, as Europe is not the
countrys main export destination. Indonesian exports mostly go to Asian countries, such as
China and Japan. The share of Indonesias exports in terms of gross domestic product (GDP) is
also relatively small compared to other export-oriented countries like China or Singapore. In
addition, Indonesia can rely on its domestic market, thanks to its huge population. Indonesia
proved its resilience when it survived the 2008 crisis, which was triggered by the Lehman
Brothers shock.
At least, the statistics show that Indonesia has good economic fundamentals amid the
global economic uncertainty. Nevertheless, the main issue might come from the financial sector,
as reflected by the falling stock exchange (JSX) in May 2012. At the beginning of May, the JSX
reached its highest level (4,226) but since then it has been on a progressive downturn, reaching
its lowest level since March 2012, at 3,902. Moreover, the bond market has also been affected
since most government bonds showed sharp corrections last week. Further, the rupiah is also
depreciating against the US dollar, which hit Rp 9,600 to the dollar on May 29, its weakest level
in 30 months.7
Similar with this, Finance Ministry's Debt Management Directorates director-general,
Rahmat Waluyanto said on Wednesday as quoted by Antara news service that he was optimistic

A.F, Raz, The Euro Crisis and Its Impact on Indonesias Economy

http://www.thejakartapost.com/news/2012/06/07/the-euro-crisis-and-its-impact-indonesia-s-economy.html

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European financial crisis would not have a big impact on Indonesia."Our domestic finance
market is quite good and therefore the current crisis in Europe won't have much effect on
Indonesia. If there are fluctuations in the stock market then the investors will turn to the
government bonds (SBN) as a safe haven."8
On the other hand, according to World Bank Managing Director Sri Mulyani, Indonesia
may be affected by the second round of the European Union debt crisis because its export
destinations are highly diversified. The impact of the European Union`s financial crisis would
spread to other countries in different parts of the world through multiple pathways, such as trade,
capital flows and remittances. But Indonesia would not feel the impact of the European crisis
through the flow of remittances. Still Indonesia must be careful in facing the risks that arise from
capital in and outflows because they were related to risk perceptions that could cause turmoil.
This is more than just sentiment, and it should really be maintained. The sentiment is associated
with risk perceptions, so volatility or turbulence in capital in and outflows become very
important. Indonesia still needs to carefully manage its budget because the European crisis was
still growing and creating uncertainties at the global level. Indonesian must remain cautious,
perhaps that is the most important thing to do.9

Conclusion
Having some times to study the world economic failures, and reading various theses by
distinguish scholars, it becomes relevant that each educated scholars all agree that the financial
world that we know is decaying and not getting better. It leads to the important questions the
countries of Asia to make these decaying situations right. Without doubt the points that the
scholars have made, all is having a different solution to this demise. No one scholar has the
perfect answer. Therefore the solution is to face the true reason for the failures of world
government to deal with the situation. Asias government mustnt follow the examples of

http://www.thejakartapost.com/news/2012/06/07/european-crisis-will-not-have-big-impact-indonesia-

official.html
9

http://www.antaranews.com/en/news/77361/second-round-of-european-crisis-may-impact-ri--sri-mulyani

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European counter part. I believe we must find our own answer to these problems and not be the
puppet of other powerful countries. Asia must take a dominant role in finding these solutions.
There are many questions that I do not have the answers. Because whilst research I found
that the necessary data is very difficult to find or may be in reality is hidden, namely the data of
countrys expenditure on arms and the protection of other countries in their alliances. The bail
out of other countries in their alliances has a knock back effect. Money spent is not directed in
the necessary direction needed to support the countrys financial progress. The more affluent
countries are made poor by the demands off others in their alliances which has a roll on situation
occurring. The money they borrow can never be paid back, because the money are not paid back
and discarded as bed debts and written off. How can the more affluent countries such losses
without having some bad effects of them selves making an economic system that is not fully
inactivation or sustainable?

References
I. Tamba. Euro Area Sovereign Debt Crisis: What Economic Policy Consequences and Implications for
the Franc Zone African Countries? International Journal of Economics and Finance; Vol. 4, No. 8; 2012
pp 2
M. Kanaoka. Have The Lessons Learned from The Asian Financial Crisis Been Applied Effectively in
Asian Economies? International Journal of Economics and Finance Vol. 4, No. 2; February 2012. pp 2
S. Banerjee, The European Debt Crisis: Implications for Asia and the Pacific. MPDD Policy Briefs,
No. 4 August 2010, pp. 1-6
A.F, Raz, The Euro Crisis and Its Impact on Indonesias Economy
http://www.thejakartapost.com/news/2012/06/07/the-euro-crisis-and-its-impact-indonesia-seconomy.html
http://en.wikipedia.org/wiki/File:Current_Account_Balances_2010.png
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/2-23042012-AP-EN.PDF
http://www.economicshelp.org/blog/2847/economics/eu-debt-crisis/
http://www.thejakartapost.com/news/2012/06/07/european-crisis-will-not-have-big-impactindonesia-official.html
http://www.antaranews.com/en/news/77361/second-round-of-european-crisis-may-impact-ri--sri-mulyani

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