[Editorial] Europe`s Financial Shock

Financial trouble surrounding three European countries has sent global markets into a state of shock. Major stock indexes worldwide have plummeted due to fears that Greece, Spain and Portugal could go insolvent due to their fiscal deficits. This also sent Korean stock prices hurtling down yesterday and made the value of the won fluctuate wildly. The world economy is on a recovery track following the global financial crisis, but volatility remains because of lingering uncertainty. While the Korean economy is considered a model for overcoming the crisis, a warning against complacency is warranted.

Greece is the epicenter of Europe`s insolvency crisis due to its inefficient public sector, deep-rooted corruption, excessive social security spending, and reduced revenue. Athens has announced plans to cut its fiscal deficit, but the declaration by Greek unions to go on a general strike has worsened Athens` finances. If the Greek crisis spreads to PIIGS countries -- Portugal, Italy, Ireland, Greece and Spain -- fears will continue to haunt international financial markets.

The International Monetary Fund is likely to rescue Greece to prevent a default. The Bank of Korea said there is no need for concern because Germany, France and other European countries are expected to provide bailout funds. Yet even if an immediate crisis is averted, experts say plenty of time is required to fundamentally resolve the problems.

Since the global financial crisis erupted in 2008, the world economy has been plagued by Eastern Europe`s economic woes, the Dubai shock, U.S. financial reform and lower growth in China. In the age of the global economy, a crisis in a vulnerable or financially squeezed economy immediately spreads to the entire world.

President Lee Myung-bak said yesterday that one country’s crisis will spread to all others, adding how well international cooperation and coordination work directly affects the domestic economy. Korea must strengthen its economic fundamentals to weather a crisis. In addition, the Group of 20 summit to be hosted by Seoul in November should seek to establish a global financial safety net.

The Greek crisis should be a lesson to economies that drastically increase fiscal spending to overcome their economic woes. Korea’s fiscal deficit accounts for 3.2 percent of GDP, far lower than Greece’s 12.7 percent, but is significantly higher than before. Seoul should begin with public sector reform to fix government inefficiency. Korea should also note that the general strike planned by Greek unions against their government’s fiscal belt-tightening and restructuring has also hurt Greece`s international credibility.