There seems to be no stopping its descent. Since the Greek sovereign debt crisis came to a head early May, the euro’s value has been steadily falling. While nations across the globe scramble to manage and minimize the far-reaching effect of the southern Europe financial crisis and the larger threat to the European Union it poses, export-heavy Korea is minding its euro woes as well.
For the month of May, financial watchers marveled at the continuous drop of the euro. Taken against the dollar, the euro has fallen from $1.5 this past November to $1.2, depreciating roughly 20 percent. Many financial institutions are forecasting a further drop for the euro - JP Morgan has predicted the euro will equal $1.18 in a year’s time, while Barclays gave an optimistic $1.25 forecast, and UBS has predicted a discouraging $1.15.
The euro is quickly losing ground against the Korean won as well. Two years ago, the euro was exchanged for 2,000 won - today, that rate is 1,400 won. The enormity of this difference becomes clear when the euro’s relative importance to Korea is taken into account - for example, the euro takes up one-third of total foreign direct investment to Korea, or a sum of $234.3 billion.
Expert consensus seems to be that the euro is unlikely to recover in the near future, since the European Union is mired in an intricate loan structure that transcends borders and makes it difficult for weaker economies of the region to sever from the approaching tide of the credit crisis.
A lesson from ‘Korean Economy 101’ will most likely include the fact that trade volume takes up much of the Korean economy. Bad financial news abroad has a tendency to quickly become bad news at home, especially in this age of dense interconnectivity between national economies. Though shipments to and from Greece and the four other European countries in dire straits - Portugal, Ireland, Italy and Spain - account for just 2 percent of Korean trade, the realized and potential impact of the Greek crisis on the whole of the European Union is the problem.
Exports to the European Union account for 12.8 percent of Korea’s total overseas shipments - making it the second largest export market for Korea - exceeding exports to the US, which accounts for 10.4 of the total; and Japan, which accounts for just 6 percent. Europe accounted for 15.4 percent of Korea’s total exports, according to Credit Suisse, an investment bank. If the euro slips further, exports to the European Union will become more expensive - and the industries heavily reliant on exports will likely feel the crunch.
The sectors most at risk, according to experts, are the automobile and mobile phone industries. “Korea’s major exports to Europe are automobiles and mobile handsets,” said Jang Bo-hyeong, a senior financial market research at the Hyundai Economic Research Institute. “The exports of these items dropped 30 to 50 percent last year due to the global financial crisis.”
However, authorities and leading Korean exporters unilaterally deny that the continued weak performance of the euro will have a great effect on the nation’s exports. In a meeting with government officials on May 15, executives from Samsung Electronics, LG Display, Posco, Hyundai Heavy Industries and STX claimed that the fiscal crisis in Europe will likely have a “limited” impact on Korea’s overall exports, citing the relatively small volume of bilateral trade between Korea and the imperiled nations. However, they did add a caveat - that because the latest crisis is the result of weak economic fundamentals in these countries, a considerable amount of time may have to pass before all concerns are laid to rest.