Australia Has Scope to Respond to Europe Turmoil, Parkinson Says

Australia has scope to respond to an economic shock emanating from Europe, where “the absence of political will” is a key barrier to fixing the region’s fiscal problems, Treasury Secretary Martin Parkinson said.

“The euro-zone crisis is unlikely to be resolved for some considerable time to come,” Parkinson, the Treasury’s top bureaucrat, said in a speech late yesterday in Canberra. “While the Greek election has been grabbing headlines and attention, we should not over-dramatize these events, but nor should we believe the election eliminates the risks emanating from Greece or from the euro zone more broadly.”

Concern that Greece, in a fifth year of recession, will reject austerity measures needed to qualify for international aid and risk the turmoil of exiting the 17-nation euro currency is easing after pro-bailout parties won enough seats to form government in weekend elections. Turmoil in Europe contrasts with Australia, where the economy under Prime Minister Julia Gillard’s government has delivered low unemployment and moderate inflation. In May her government forecast it will end four years of deficits with an A$1.54 billion ($1.5 billion) surplus for the year starting July 1.

“Australia is well-placed to cope with whatever emanates from Europe,” Parkinson said. “We have significant flexibility and capacity at our disposal to cope with a range of different global scenarios.”

Sound Banks

He said that that “our banks are well-capitalized and have sufficient resources to withstand a freeze in international capital markets for several months” and “our main trade links are with the emerging Asian economies.”

Gillard has said balancing the budget would give the Reserve Bank of Australia “maximum room” to lower interest rates if needed to boost growth. While the RBA has cut the overnight cash rate target four times in eight months to 3.5 percent, the nation’s benchmark borrowing cost is still the highest among major developed economies.

“In the event that a demand or confidence shock emanating from Europe affects us via our Asian markets, macroeconomic policy is well-placed to respond and we would expect the exchange rate to adjust in ways that help buffer the impacts,” said Parkinson, who also sits on the central bank’s board.

Powering the Australian economy is the biggest resource boom since New South Wales prospectors set off a gold rush in the 1850s. The latest bonanza -- for iron ore, coal and natural gas -- is bringing investment projects the government estimates to be worth A$500 billion and helped keep the unemployment rate at 5.1 percent last month. That’s lower than 8.2 percent in the U.S. and 11 percent in the euro area.

Chinese Demand

Mining companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group are benefiting from surging demand for steel and electricity in emerging economies including China and India.

Australia’s gross domestic product expanded 1.3 percent in the first quarter this year from the final three months of 2011, making it one of the fastest-growing developed economies. The number of people employed rose by 38,900 in May, capping the best January-May period in five years, government figures showed this month.

European nations could learn from Australia’s economic policies, Gillard said in a speech yesterday ahead of the two- day Group of 20 summit in Los Cabos, Mexico.

“Austerity measures -- measures which we freely acknowledge have been followed in response to well-grounded concerns about sovereign debt -- need to be accompanied by a commitment to growth which is equally urgent and strong,” she said. “Australia’s economic strength can be an important sign of optimism to countries of the world.”

Sagging Confidence

Still, consumer confidence in Australia has stagnated in recent months as households remained concerned that Europe’s fiscal crisis will derail the global economy. A local currency that’s advanced about 44 percent since the start of 2009 against the U.S. dollar has hurt businesses and workers in the tourism, education and manufacturing industries.

The nation must maintain macroeconomic “pillars” that have supported the economy, including a floating exchange rate, independent monetary policy through the central bank and fiscal policy aimed at running budget surpluses, Parkinson said.

“It is important that we maintain and build on these assets,” Parkinson said. “In the current environment of volatility and uncertainty, with what can seem overwhelming global and domestic pressures, some have been tempted to suggest dismantling or undermining this framework.”

To contact the reporters on this story: Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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