By Kim Jae-chun

After experiencing unrest due to the sovereign debt problems in the euro area from the second half of last year, the world financial markets have recently shown signs of stabilizing a bit, thanks mostly to the Greek bailout agreement and expansion in the ECB’s liquidity supply.

Risk factors do still remain, however, given the sluggish state of the euro area real economy due to fiscal austerity and deleveraging, and also since the fundamental causes of the sovereign debt problems are in the short term difficult to resolve. Some signs of gradual recovery are being seen in the U.S. economy, but it is also difficult to feel relieved from them, since it will take considerable time for the U.S. housing market and employment conditions to improve.

Meanwhile, geopolitical risks on the Korean Peninsula and in the Middle East, arising from the shift to the Kim Jong-un regime after the death of Kim Jong-il and the imposition of sanctions on Iran, are acting as destabilizing factors for the Korean economy.

If uncertainty rises, the real sector contracts as firms and households display ‘wait and see attitudes’ ¬¬_ the former delaying their decisions on investment and hiring, and the latter on consumption. The consequent risk premiums in the financial markets also increase, causing the financing costs of economic agents to rise and the lending attitudes of financial institutions to grow conservative, thus exerting additional negative impacts on investment and consumption.

The substantial slowdowns of the Korean and global economies from the second half of last year can be attributed in large part to the elevated uncertainties stemming from the euro area fiscal woes and the heightening of various geopolitical risks.

As the world economy seeks a new equilibrium, there is also a possibility of the channel through which the psychological unease of economic agents leads to a slowdown in economic growth. It is highly likely that the trend of low growth will continue for the time being, due to the overall movement toward strengthened regulations, the reduced space for fiscal and other policies and population aging.

In the process of such a transition from a period of high to one of lowest growth, the speed of economic recovery is slow and employment conditions worsen, and unease among economic agents can therefore spread. Specifically, if economic agents are unable to clearly recognize and adjust to this shift to a low growth mode, a pullback in confidence comparable in impact to the rise in economic uncertainty can emerge and cause economic growth to slow.

The Korean and world economies are forecast to show gradual recoveries, as the uncertainties related to the eurozone fiscal crisis to ease somewhat from the second half of this year. Uncertainties remain high in various sectors, however, and efforts on the parts of policymakers and private economic agents are called for to alleviate their negative effects on real economic activity.

First, policymakers should put the anxieties of economic agents to rest by presenting a clear economic policy roadmap for the future. Politicians and economic policymakers in the euro area should propose fundamental and highly practicable solutions to their sovereign debt problems, including plans to strengthen fiscal discipline and restore industrial competitiveness.

Policy authorities in Korea, similarly, should assess the geopolitical risks on the Korean Peninsula and in the Middle East under various possible scenarios and make provisions accordingly. And private economic agents, too, including households and firms, should respond actively in this period of transition by discovering new outlets for investment and working to adopt consumption patterns befitting a new era. They must avoid a mistake of losing one’s earnings due to a vague sense of anxiety.